endowment effect

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pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

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Buyers were willing to pay about half of what sellers would demand, even with markets and learning. Again we see that losses are roughly twice as painful as gains are pleasurable, a finding that has been replicated numerous times over the years. The endowment effect experiments show that people have a tendency to stick with what they have, at least in part because of loss aversion. Once I have that mug, I think of it as mine. Giving it up would be a loss. And the endowment effect can kick in very fast. In our experiments, the subjects had “owned” that mug for a few minutes before the trading started. Danny liked to call this the “instant endowment effect.” And while loss aversion is certainly part of the explanation for our findings, there is a related phenomenon: inertia. In physics, an object in a state of rest stays that way, unless something happens.

Many years later Kahneman and Tversky would call this distinction “framing,” but marketers already had a gut instinct that framing mattered. Paying a surcharge is out-of-pocket, whereas not receiving a discount is a “mere” opportunity cost. I called this phenomenon the “endowment effect” because, in economists’ lingo, the stuff you own is part of your endowment, and I had stumbled upon a finding that suggested people valued things that were already part of their endowment more highly than things that could be part of their endowment, that were available but not yet owned. The endowment effect has a pronounced influence on behavior for those considering attending special concerts and sporting events. Often the retail price for a given ticket is well below the market price. Someone lucky enough to have grabbed a ticket, either by waiting in line or by being quickest to click on a website, now has a decision to make: go to the event or sell the ticket?

Second, they invoked a version of the invisible handwave to argue that the misbehaving observed in the Knetsch and Sinden experiment would disappear if the subjects were making choices in a market context, meaning buyers and sellers trading and prices fluctuating. Danny and I returned to Vancouver with a mission: design an experiment that would convince Plott and Smith that the endowment effect was real. Naturally, since Jack had conducted the original experiment and was part of our fairness team, we joined forces with him on the new design. The discussion with Charlie and Vernon also led us to recognize that the endowment effect, if true, will reduce the volume of trade in a market. Those who start out with some object will tend to keep it, while those who don’t have such an object won’t be that keen to buy one. We wanted to come up with a design that could exploit this prediction. The basic idea was to build on Jack’s original study and add a market.


pages: 654 words: 191,864

Thinking, Fast and Slow by Daniel Kahneman

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Albert Einstein, Atul Gawande, availability heuristic, Bayesian statistics, Black Swan, Cass Sunstein, Checklist Manifesto, choice architecture, cognitive bias, complexity theory, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, delayed gratification, demand response, endowment effect, experimental economics, experimental subject, Exxon Valdez, feminist movement, framing effect, hindsight bias, index card, information asymmetry, job satisfaction, John von Neumann, Kenneth Arrow, libertarian paternalism, loss aversion, medical residency, mental accounting, meta analysis, meta-analysis, nudge unit, pattern recognition, Paul Samuelson, pre–internet, price anchoring, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, Robert Metcalfe, Ronald Reagan, The Chicago School, The Wisdom of Crowds, Thomas Bayes, transaction costs, union organizing, Walter Mischel, Yom Kippur War

Quarterly Journal of Economics 118 (2003): 47–71. Jack Knetsch also: Jack L. Knetsch, “The Endowment Effect and Evidence of Nonreversible Indifference Curves,” American Economic Review 79 (1989): 1277–84. ongoing debate about the endowment effect: Charles R. Plott and Kathryn Zeiler, “The Willingness to Pay–Willingness to Accept Gap, the ‘Endowment Effect,’ Subject Misconceptions, and Experimental Procedures for Eliciting Valuations,” American Economic Review 95 (2005): 530–45. Charles Plott, a leading experimental economist, has been very skeptical of the endowment effect and has attempted to show that it is not a “fundamental aspect of human preference” but rather an outcome of inferior technique. Plott and Zeiler believe that participants who show the endowment effect are under some misconception about what their true values are, and they modified the procedures of the original experiments to eliminate the misconceptions.

However, it is well understood that reference points are labile, especially in unusual laboratory situations, and that the endowment effect can be eliminated by changing the reference point. No endowment effect is expected when owners view their goods as carriers of value for future exchanges, a widespread attitude in routine commerce and in financial markets. The experimental economist John List, who has studied trading at baseball card conventions, found that novice traders were reluctant to part with the cards they owned, but that this reluctance eventually disappeared with trading experience. More surprisingly, List found a large effect of trading experience on the endowment effect for new goods. At a convention, List displayed a notice that invited people to take part in a short survey, for which they would be compensated with a small gift: a coffee mug or a chocolate bar of equal value.

As the volunteers were about to leave, List said to each of them, “We gave you a mug [or chocolate bar], but you can trade for a chocolate bar [or mug] instead, if you wish.” In an exact replication of Jack Knetsch’s earlier experiment, List found that only 18% of the inexperienced traders were willing to exchange their gift for the other. In sharp contrast, experienced traders showed no trace of an endowment effect: 48% of them traded! At least in a market environment in which trading was the norm, they showed no reluctance to trade. Jack Knetsch also conducted experiments in which subtle manipulations made the endowment effect disappear. Participants displayed an endowment effect only if they had physical possession of the good for a while before the possibility of trading it was mentioned. Economists of the standard persuasion might be tempted to say that Knetsch had spent too much time with psychologists, because his experimental manipulation showed concern for the variables that social psychologists expect to be important.


pages: 241 words: 75,516

The Paradox of Choice: Why More Is Less by Barry Schwartz

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accounting loophole / creative accounting, attribution theory, Atul Gawande, availability heuristic, Cass Sunstein, Daniel Kahneman / Amos Tversky, endowment effect, framing effect, income per capita, job satisfaction, loss aversion, medical residency, mental accounting, Own Your Own Home, Pareto efficiency, positional goods, price anchoring, psychological pricing, RAND corporation, Richard Thaler, science of happiness, The Wealth of Nations by Adam Smith

Considering the random distribution, you would think that about half the people in the group would have gotten the object they preferred and that the other half would be happy to swap. But in fact, there are very few trades. This phenomenon is called the endowment effect. Once something is given to you, it’s yours. Once it becomes part of your endowment, even after a very few minutes, giving it up will entail a loss. And, as prospect theory tells us, because losses are more bad than gains are good, the mug or pen with which you have been “endowed” is worth more to you than it is to a potential trading partner. And “losing” (giving up) the pen will hurt worse than “gaining” (trading for) the mug will give pleasure. Thus, you won’t make the trade. The endowment effect helps explain why companies can afford to offer money-back guarantees on their products. Once people own them, the products are worth more to their owners than the mere cash value, because giving up the products would entail a loss.

Once people own them, the products are worth more to their owners than the mere cash value, because giving up the products would entail a loss. Most interestingly, people seem to be utterly unaware that the endowment effect is operating, even as it distorts their judgment. In one study, participants were given a mug to examine and asked to write down the price they would demand for selling it if they owned it. A few minutes later, they were actually given the mug, along with the opportunity to sell it. When they owned the mug, they demanded 30 percent more to sell it than they had said they would only a few minutes earlier! One study compared the way in which the endowment effect influences people to make car-buying decisions under two conditions. In one condition, they were offered the car loaded with options, and their task was to eliminate the options they didn’t want.

Moxey, “Perspective in Statements of Quantity, with Implications for Consumer Psychology,” Psychological Science, 2002, 13, 130–134. Or suppose you are Many examples of phenomena discussed in this section can be found in articles collected in D. Kahneman and A. Tversky (eds.), Choices, Values, and Frames (New York: Cambridge University Press, 2000). On the endowment effect, see D. Kahneman, J. Knetsch, and R. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias.” On decisions to sell stock, see T. Odean, “Are Investors Reluctant to Realize Their Losses?” On sunk costs, see R. Thaler, “Mental Accounting Matters,” and R. Thaler, “Toward a Positive Theory of Consumer Choice.” On health insurance decisions, see E. Johnson, J. Hershey, J. Mezaros, and H. Kunreuther, “Framing, Probability Distortions, and Insurance Decisions.”


pages: 397 words: 109,631

Mindware: Tools for Smart Thinking by Richard E. Nisbett

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affirmative action, Albert Einstein, availability heuristic, big-box store, Cass Sunstein, choice architecture, cognitive dissonance, correlation coefficient, correlation does not imply causation, cosmological constant, Daniel Kahneman / Amos Tversky, dark matter, endowment effect, experimental subject, feminist movement, fixed income, fundamental attribution error, glass ceiling, Henri Poincaré, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, job satisfaction, lake wobegon effect, libertarian paternalism, loss aversion, low skilled workers, Menlo Park, meta analysis, meta-analysis, quantitative easing, Richard Thaler, Ronald Reagan, selection bias, Socratic dialogue, Steve Jobs, Steven Levy, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, William of Occam, Zipcar

Giving teachers the same amount of money at the beginning of the term and telling them they would have to pay back that amount if their students failed to meet a specified target resulted in a significant positive effect on student performance.4 It’s not possible to justify the endowment effect in cost-benefit terms. I should be willing to sell a commodity at the same or slightly higher price than I paid for it. Even economists are susceptible to a range of biases, including the endowment effect bias, which prevent them from being fully rational in cost-benefit terms. The endowment effect concept, in fact, first occurred to the economist Richard Thaler when he thought about the behavior of an economist colleague who was a wine enthusiast. The man never paid more than thirty-five dollars for a bottle of wine but was sometimes unwilling to sell a bottle bought at that price even for amounts as large as one hundred dollars.5 Having such a large spread between buying price and selling price can’t be defended in terms of the normative rules of cost-benefit theory.

On average, owners are willing to sell only when the price is double what the average nonowner is willing to pay.2 Loss aversion lies behind this endowment effect. People don’t want to give up things they own, even for more than they originally considered a fair price. Imagine you bought a ticket to a football game for two hundred dollars but would have been willing to pay five hundred dollars. Then a couple of weeks later you discover on the Internet that there are lots of desperate people willing to pay up to two thousand dollars for a ticket. Do you sell? Maybe not. There can be a huge spread between what something was worth to buy and what it’s worth to sell—for no better reason than that we would have to give the thing up.3 The performing arts presenters at my university make good use of the endowment effect in their promotional campaigns. Sending people a twenty-dollar voucher they can use for ticket purchase nets 70 percent more ticket sales than mailing them a letter with a promo code for a twenty-dollar discount.

We fail to make a friend because we made hasty judgments based on insufficient evidence. We hire people who are not the most capable because we trusted firsthand information too much and more extensive and superior information from other sources too little. We lose money because we don’t realize the applicability of statistical concepts such as standard deviation and regression and the relevance of psychological concepts such as the endowment effect, which causes us to want to keep things for no better reason than that we have them, and economic concepts such as sunk costs, which cause us to send good money after bad. We eat foods and take medicines and consume vitamins and other supplements that aren’t good for us because we’re not sufficiently skilled in evaluating alleged scientific findings about health practices. Society tolerates government and business practices that make our lives worse because they were developed without following effective evaluation procedures and remain untested long after they were introduced—sometimes for decades and at costs in the billions of dollars.


pages: 415 words: 125,089

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

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Albert Einstein, Alvin Roth, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, Bayesian statistics, Big bang: deregulation of the City of London, Bretton Woods, buttonwood tree, capital asset pricing model, cognitive dissonance, computerized trading, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Lloyd's coffeehouse, endowment effect, experimental economics, fear of failure, Fellow of the Royal Society, Fermat's Last Theorem, financial deregulation, financial innovation, full employment, index fund, invention of movable type, Isaac Newton, John Nash: game theory, John von Neumann, Kenneth Arrow, linear programming, loss aversion, Louis Bachelier, mental accounting, moral hazard, Myron Scholes, Nash equilibrium, Paul Samuelson, Philip Mirowski, probability theory / Blaise Pascal / Pierre de Fermat, random walk, Richard Thaler, Robert Shiller, Robert Shiller, spectrum auction, statistical model, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas Bayes, trade route, transaction costs, tulip mania, Vanguard fund, zero-sum game

In 1995, they launched their own firm to manage money in accordance with their contrarian model. Thaler never recovered from his early fascination with that "very interesting" disparity between prices for which people were willing to buy and sell the identical items. He coined the expression "endowment effect" to describe our tendency to set a higher selling price on what we own (are endowed with) than what we would pay for the identical item if we did not own it.* In a paper written in 1990 with Daniel Kahneman and another colleague, Jack Knetsch, Thaler reported on a series of classroom experiments designed to test the prevalence of the endowment effect.t4 In one experiment, some of the students were given Cornell coffee mugs and were told they could take them home; they were also shown a range of prices and asked to set the lowest price at which they would consider selling their mug.

NBER Reporter, National Bureau of Economic Research, Fall, pp. 9-13. Thaler, Richard H., and Hersh Shefrin, 1981. "An Economic Theory of SelfControl." Journal of Political Economy, Vol. 89, No. 2 (April), pp. 392-406. In Thaler, 1991. Thaler, Richard H., Amos Tversky, and Jack L. Knetsch, 1990. "Experimental Tests of the Endowment Effect." Journal ofPolitical Economy, Vol. 98, No. 6, pp. 1325-1348. Thaler, Richard H., Amos Tversky, and Jack L. Knetsch, 1991. "Endowment Effect, Loss Aversion, and Status Quo Bias." Journal of Economic Perspectives, Vol. 5, No. 1, pp. 193-206. Todhunter, Isaac, 1931. A History of the Mathematical Theory of Probability from the Time of Pascal to that of Laplace. New York: G. E. Stechert & Co. Originally published in Cambridge, England, in 1865. Townsend, Robert M., 1995.

.* In a paper written in 1990 with Daniel Kahneman and another colleague, Jack Knetsch, Thaler reported on a series of classroom experiments designed to test the prevalence of the endowment effect.t4 In one experiment, some of the students were given Cornell coffee mugs and were told they could take them home; they were also shown a range of prices and asked to set the lowest price at which they would consider selling their mug. Other students were asked the highest price they would be willing to pay to buy a mug. The average owner would not sell below $5.25, while the average buyer would not pay more than $2.25. A series of additional experiments provided consistent results. The endowment effect is a powerful influence on investment decisions. Standard theory predicts that, since rational investors would all agree on investment values, they would all hold identical portfolios of risky assets like stocks. If that portfolio proved too risky for one of the investors, he could combine it with cash, while an investor seeking greater risk could use the portfolio as collateral for borrowings to buy more of the same. The real world is not like that at all. True, the leading institutional investors do hold many stocks in common because the sheer volume of dollars they must invest limits them to stocks with the highest market values-stocks like General Electric and Exxon.


pages: 324 words: 93,175

The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home by Dan Ariely

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Alvin Roth, assortative mating, Burning Man, business process, cognitive dissonance, corporate governance, Daniel Kahneman / Amos Tversky, end world poverty, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, George Akerlof, happiness index / gross national happiness, Jean Tirole, job satisfaction, knowledge economy, knowledge worker, loss aversion, Peter Singer: altruism, placebo effect, Richard Thaler, Saturday Night Live, second-price auction, software as a service, The Wealth of Nations by Adam Smith, ultimatum game, Upton Sinclair, young professional

Ziv Carmon and Dan Ariely, “Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers,” Journal of Consumer Research 27, no. 3 (2000): 360–370. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5, no. 1 (1991): 193–206. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” The Journal of Political Economy 98, no. 6 (1990): 1325–1348. Jack Knetsch, “The Endowment Effect and Evidence of Nonreversible Indifference Curves,” The American Economic Review 79, no. 5 (1989): 1277–1284. Justin Kruger, Derrick Wirtz, Leaf Van Boven, and T. William Altermatt, “The Effort Heuristic,” Journal of Experimental Social Psychology 40, no. 1 (2004): 91–98.

Given the arm’s limited functionality, the pain I experienced and am still experiencing, and what I now know about flawed decision making, I suspect that keeping my arm was, in a cost/benefit sense, a mistake. Let’s look at the biases that affected me. First, it was difficult for me to accept the doctors’ recommendation because of two related psychological forces we call the endowment effect and loss aversion. Under the influence of these biases, we commonly overvalue what we have and we consider giving it up to be a loss. Losses are psychologically painful, and, accordingly, we need a lot of extra motivation to be willing to give something up. The endowment effect made me overvalue my arm, because it was mine and I was attached to it, while loss aversion made it difficult for me to give it up, even when doing so might have made sense. A second irrational influence is known as the status quo bias. Generally speaking, we tend to want to keep things as they are; change is difficult and painful, and we’d rather not change anything if we can help it.

Finally, when I thought about the prospect of losing my forearm and hand, I wondered about whether I could ever adapt. What would it feel like to use a hook or a prosthesis? How would people look at me? What would it be like when I wanted to shake someone’s hand, write a note, or make love? Now, if I had been a perfectly rational, calculating being who lacked any trace of emotional attachment to my arm, I would not have been bothered by the endowment effect, loss aversion, the status quo bias, or the irreversibility of my decision. I would have been able to accurately predict what the future with an artificial arm would hold for me, and as a consequence I would probably have been able to see my situation the way my doctors did. If I were that rational, I might very well have chosen to follow their advice, and most likely I would have eventually adapted to the new apparatus (as we learned in chapter 6, “On Adaptation”).


pages: 519 words: 104,396

Priceless: The Myth of Fair Value (And How to Take Advantage of It) by William Poundstone

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availability heuristic, Cass Sunstein, collective bargaining, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, East Village, en.wikipedia.org, endowment effect, equal pay for equal work, experimental economics, experimental subject, feminist movement, game design, German hyperinflation, Henri Poincaré, high net worth, index card, invisible hand, John von Neumann, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, loss aversion, market bubble, mental accounting, meta analysis, meta-analysis, Nash equilibrium, new economy, Paul Samuelson, payday loans, Philip Mirowski, Potemkin village, price anchoring, price discrimination, psychological pricing, Ralph Waldo Emerson, RAND corporation, random walk, RFID, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, rolodex, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, ultimatum game, working poor

Available at www.floridatrend.com/article.asp?aID=54506009.7270968.618345.8370013.6266116.730&aID2=47556. Keller, Maryann (2000). “Getting a Premium over List Price.” Automotive Industries, May 1, 2000. Khamsi, Roxanne (2007). “Hormones Affect Men’s Sense of Fair Play.” New Scientist, July 4, 2007. Knetsch, Jack (1989). “The Endowment Effect and Evidence of Nonreversible Indifference Curves.” The American Economic Review 79, 1277–84. Knetsch, Jack L., Richard Thaler, and Daniel Kahneman (1986). “Experimental Tests of the Endowment Effect and the Coase Theorem.” Simon Fraser University Working Paper, 1988. Kouri, Elena, Scott Lukas, Harrison Pope, and P. Oliva (1995). “Increased Aggressive Responding in Male Volunteers Following the Administration of Gradually Increasing Doses of Testosterone Cypriate.” Drug and Alcohol Dependence 40, 73–79.

Subjects were asked to pretend that they wanted to buy each bet and to state the maximum price they would be willing to pay for it. Logically, there shouldn’t be a difference in buying and selling prices for a simple money bet. The bet is worth whatever it’s worth. But Lichtenstein and Slovic found that people buying bets were less likely to assign high prices to the $ bets. The number of preference reversals greatly diminished. This was an early description of what’s now known as the endowment effect (a name coined by the University of Chicago economist Richard Thaler in 1980). In the absence of market values, selling prices are typically twice as much as buying prices (above and beyond any strategic exaggeration for the sake of bargaining). Lichtenstein and Slovic thus tried three ways of assessing value and found them all potentially contradictory. In the years since 1971, psychologists and economists alike have tried to explain preference reversal—or explain it away.

Money Pump 62 “When we had written it up”: Lichtenstein interview, July 28, 2008. 62 Article with Slovic’s name first: Slovic, Lichtenstein, and Edwards 1965. 62 “I sort of followed hubby around”: Lichtenstein interview, July 28, 2008. 62 “It was a terrific inducement”: Ibid. 63 “I remember we were in Paul’s office”: Ibid. 65 127 subjects always reversed: Lichtenstein and Slovic (eds.) 2006, 54. 65 “These reversals clearly constitute”: Ibid., 63. 66 endowment effect: The term was coined in Thaler 1980. 66 A 10/12 chance of winning $9: Lichtenstein and Slovic (eds.) 2006, 71. 66 “If the odds were . . . heavier”: Ibid., 48. 67 “The strain of amalgamating different types of information”: Ibid., 76. 68 Audio recording on the Web: The audio is on the Decision Research website at www.decisionresearch.org/mp3/PreferenceReversalInterview.mp3. 68 “I see.


pages: 254 words: 72,929

The Age of the Infovore: Succeeding in the Information Economy by Tyler Cowen

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Albert Einstein, Asperger Syndrome, Cass Sunstein, cognitive bias, David Brooks, en.wikipedia.org, endowment effect, Flynn Effect, framing effect, Google Earth, impulse control, informal economy, Isaac Newton, loss aversion, Marshall McLuhan, Naomi Klein, neurotypical, new economy, Nicholas Carr, pattern recognition, phenotype, placebo effect, Richard Thaler, selection bias, Silicon Valley, the medium is the message, The Wealth of Nations by Adam Smith, theory of mind

Such detailed discrimination of the particular should mean that people with autism are not prone to stereotyping in their thinking or memories. We should not conclude that autistics are more objective about everything (we just don’t know), but the difference in perspective is intriguing. Another well-known bias, familiar from behavioral economics, is called the endowment effect. People tend to place excess value on the objects they already own or perceive as belonging to them. Some recent research (“Explaining Enhanced Logical Consistency During Decision Making in Autism” by Benedetto De Martino et al.) suggests autistics are less likely to suffer from endowment effects and in this regard they are more likely to behave according to standards of economic rationality. A classic laboratory experiment starts people with a sum of money, in this case fifty British pounds, and offers them a comparison between two sure options: “keeping twenty pounds” and “losing thirty pounds.”

There also may be more fundamental cognitive reasons for an autistic predisposition toward cosmopolitan attitudes. A nation or culture is a bit like an endowment effect, namely that most people value it more highly, with special degrees of fervor, simply because it is theirs. Herodotus remarked long ago that each person thinks that his way of life is best. You can find exceptions, but if you look, say, at the wars in the former Yugoslavia, most Serbs favored the Serbian side, most Bosnians favored the Bosnian side, and so on. There were Soviet dissidents who hoped their country would be conquered by the United States but overall political “turncoats” of this kind are relatively rare. Most people take the side of their country or their culture or their region, simply because it is theirs. If autistics suffer less from the bias of endowment effects, perhaps they are also less likely to value a nation highly, again, simply because it is theirs.

See focusing Constitution of Liberty (Hayek), 201 consumer satisfaction, 120 control of information, 4–5 conversation summaries, 97 coordination, 132–33, 134 corruption, 208 cosmopolitanism, 196–99, 201, 203 “The Costs of Autism” (Ganz), 34 countries, travel to, 104–5 Cowansage, Kiriana, 173–75, 187–88 Cowen, Tyler (nine-year-old), 86 Craigslist, 24, 47 creativity, 58 Critique of Pure Reason (Kant), 205 culture access to, 41, 42–43, 61–63 and acculturation, 106–7 addiction to, 55–56 and attention spans, 53–55 costs of, 43 cultural literacy, 59 culture of small bits, 43–44, 50–51 diversity in, 198, 218–21 effect of the internet on, 46 and information overload, 50–51 and instant messaging, 70–71 and least-common-denominator effect, 134 and multitasking, 51–53, 56–57 romance compared to, 42, 60–62 sampling of, 41, 44–48 self-assembled blends of, 51–52, 56–58, 65, 67, 154 term, 41–42 ugliness of, 41, 59–60, 62, 63 value in, 9 Dalai Lama, 92, 95, 96, 156 Danto, Arthur, 191 Darwin, Charles, 25, 166 Dawson, Michelle, 27–28 daydreaming, 108–9 Declaration of Independence, 200 Delicious, 10–11 De Martino, Benedetto, 195 democracy, 207 detail-oriented personalities, 148–49, 176, 189 Dickinson, Emily, 166 difficulties experienced by autistics, 110, 212 Digg lists, 55 Dirac, Paul, 25, 166 discrimination aimed at autistics, 197, 221–22 Distinction (Bourdieu), 177 diversity, 198 division of labor, 215–16 Don Giovanni (Mozart), 57–58 Donohoo, Mark, 3 Don Quixote (Cervantes), 120–21 Doyle, Sir Arthur Conan, 148, 153, 154, 155–56, 160 Drake Equation, 224–25 Dudley, Leonard, 65 Dylan, Bob, 166 Dyson, Esther, 49 eating habits, 31 eBay, 47, 85 echolalia, 31, 168 Eco, Umberto, 156 economics, 121–22, 123–26, 129, 202 Edison, Thomas, 25, 166 education, 105–15 and acculturation, 106–7 and aesthetic values, 177 and autistic cognitive skills, 107, 109–11, 115, 215 and face-to-face instruction, 111–15 and focusing, 108–9, 115 limits of, 211 rate of return on, 115 signaling model of, 106, 110 8hands.com, 9 Einstein, Albert, 25, 166 email, 52, 78 e-memory, 98 employment, 69 endowment effect, 195–96, 199 engineering, 24 ethics, codes of, 199 evangelical Protestants, 107 everytrail.com, 12 exchange, benefits of, 218 expectations, 60–61, 81–82, 124 experience machine, 142–46 “Explaining Enhanced Logical Consistency During Decision Making in Autism” (De Martino et al.), 195 eye contact, 31, 36 eyesight, 18 Facebook and advanced civilizations, 227–28 and framing effects, 81–84 groups in, 86, 87 and mental ordering, 7–8, 12, 13 popularity of, 47 facial recognition, 25, 132 Fasanella, Kathleen, 1 Fauron, M., 104 FeedDemon, 85–86 Fein, Deborah, 26 Feldman, Morton, 44 Fermi, Enrico, 223 Fermi Paradox, 223, 225, 227 films, 114, 134 Finding Angela Shelton (Shelton), 86 Finland, 219–21 Finland: Cultural Lone Wolf (Lewis), 220 Flickr, 11 focal points, 130–32, 133, 136 focusing of Adam Smith, 168 of autistics, 92–94, 109, 111 and education, 108–9, 115 folksonomy, 11 food preferences, 31 framing effects and articulable interests, 89 and autistics, 196 and communication, 78–84 defined, 6 and the experience machine, 143–44 and Facebook, 81–84 and mental ordering, 6–7 freedom, 200–201, 208–9 Freud, Sigmund, 103, 179 Friedman, Milton, 179 FriendFeed, 9 friendship, 81–82, 85, 208 Fuser, 9 Ganz, Michael L., 34 Garmin Forerunner 305 GPS, 12 Gates, Bill, 25 Gathera, 9 gender imbalances, 69–70 genetic component of autism, 36 The Glass Bead Game (Hesse), 160–66 Gödel, Kurt, 202 Godfather series, 134 Gogh, Vincent van, 25, 166 goods, 139–40 Google and articulable interests, 88–89 and attention spans, 53, 54–55 and dress code, 130 and mental ordering, 13 popularity of, 46 Google Earth, 10, 131 Googlegänger, 86 Google Reader, 85–86 Google Sky, 10 Gore, Thomas, 25 Gould, Glenn, 25, 166, 167 Grandin, Temple, 24–25, 180, 216, 219 Great Depression, vii groups, 87 groupthink, 197 Guevara, Ernesto “Che,” 179 Guinness World Records, 105 Halberstadt, Germany, 44 Handbook of Autism and Pervasive Developmental Disorders, 38 Hanson, Robin, 193–94 Harlequin novels, 127 Harry Potter series, 128, 133 Hart-Davis, Guy, 5 Hassan, Mohammed, 86 Hayek, Friedrich A., 201–3 Heidegger, Martin, 142 Herodotus, 199 Hesse, Hermann, 160–66 historical figures, 166–67 Hofstetter, Steve, 8 Holmes, Mycroft (fictional character), 151–53 Holmes, Sherlock (fictional character), 148–60 brother of, 151–53 commercial success of series, 156, 165 detail-oriented personality of, 148–49, 156, 158–59 orderliness of, 150, 159 powers of reasoning of, 152, 153, 156–57 social intelligence and interactions of, 149–50, 154, 156, 157 Holt, Molly, 26 The Holy Grail, 137 homo ordo, 13 House, Gregory (fictional character), 154 household production, 141 House M.D., 154 HowManyAsMe website, 86 HTML, 71 Hume, David, 177, 204 humor, 31 Hussain, Zakir, 187 Hussein, Saddam, 122 identity, 120, 134, 136–37 incentives, 122, 123–24 Indian classical music, 187 individual, respect for the, 222–23 Inferno (Dante), 128 information, 50–51, 55 information technology, 213 infovores, 2–3, 7, 10, 45 in-group relations, 197–99 Innis, Harold, 65 instant messaging (IM), 66–71, 84 intelligence animal intelligence, 224 and autism and autistic individuals, 18–19, 21, 27–28 and Google, 54 and multitasking, 52–53 non-human, 223–28 interiority, 117, 223, 226–28 internet.


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Essentialism: The Disciplined Pursuit of Less by Greg McKeown

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Albert Einstein, Clayton Christensen, Daniel Kahneman / Amos Tversky, deliberate practice, double helix, en.wikipedia.org, endowment effect, Isaac Newton, iterative process, Jeff Bezos, Lao Tzu, loss aversion, Mahatma Gandhi, microcredit, minimum viable product, North Sea oil, Peter Thiel, Ralph Waldo Emerson, Richard Thaler, Rosa Parks, side project, Silicon Valley, Silicon Valley startup, sovereign wealth fund, Steve Jobs, Vilfredo Pareto

Comfortable with cutting losses Sunk-cost bias, while all too common, isn’t the only Nonessentialist trap to watch out for. Below are several other common traps and tips for how to extricate yourself politely, gracefully, and with minimal cost. Avoiding Commitment Traps BEWARE OF THE ENDOWMENT EFFECT A sense of ownership is a powerful thing. As the saying goes, nobody in the history of the world has washed their rental car! This is because of something called “the endowment effect,” our tendency to undervalue things that aren’t ours and to overvalue things because we already own them. In one study demonstrating the power of the endowment effect, the Nobel Prize–winning researcher Daniel Kahneman and colleagues randomly gave coffee mugs to only half the subjects in an experiment.5 The first group was asked how much they would be willing to sell their mug for, while the second group was asked what they would be willing to pay for it.

The project that isn’t getting anywhere at work seems that much more critical when we’re the team leader on it. The commitment to volunteer at the local bake sale becomes harder to get out of when we’re the one who put the fund-raiser together. When we feel we “own” an activity, it becomes harder to uncommit. Nonetheless, here is a useful tip: PRETEND YOU DON’T OWN IT YET Tom Stafford describes a simple antidote to the endowment effect.6 Instead of asking, “How much do I value this item?” we should ask, “If I did not own this item, how much would I pay to obtain it?” We can do the same for opportunities and commitment. Don’t ask, “How will I feel if I miss out on this opportunity?” but rather, “If I did not have this opportunity, how much would I be willing to sacrifice in order to obtain it?” Similarly, we can ask, “If I wasn’t already involved in this project, how hard would I work to get on it?”

“Ministers Knew Aircraft Would Not Make Money,” Independent, http://www.independent.co.uk/news/uk/ministers-knew-aircraft-would-not-make-money-concorde-thirty-years-ago-harold-macmillan-sacked-a-third-of-his-cabinet-concorde-was-approved-the-cuba-crisis-shook-the-world-and-ministers-considered-pit-closures-anthony-bevins-and-nicholas-timmins-review-highlights-from-1962-government-files-made-public-yesterday-1476025.html 3. Gillman, “Supersonic Bust.” 4. Michael Rosenfield, “NH Man Loses Life Savings on Carnival Game,” CBS Boston, April 29, 2013, http://boston.cbslocal.com/2013/04/29/nh-man-loses-life-savings-on-carnival-game/. 5. Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspective 5, no. 1 (1991): 193–206, http://users.tricity.wsu.edu/~achaudh/kahnemanetal.pdf. 6. Tom Stafford, “Why We Love to Hoard … and How You Can Overcome It,” BBC News, July 17, 2012, www.bbc.com/future/story/20120717-why-we-love-to-hoard. 7. I originally wrote this in a blog post for Harvard Business Review called “The Disciplined Pursuit of Less,” August 8, 2012, http://blogs.hbr.org/2012/08/the-disciplined-pursuit-of-less/. 8.


pages: 345 words: 87,745

The Power of Passive Investing: More Wealth With Less Work by Richard A. Ferri

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asset allocation, backtesting, Bernie Madoff, capital asset pricing model, cognitive dissonance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, endowment effect, estate planning, Eugene Fama: efficient market hypothesis, fixed income, implied volatility, index fund, intangible asset, Long Term Capital Management, money market fund, passive investing, Paul Samuelson, Ponzi scheme, prediction markets, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve, zero-sum game

However, I didn’t fully appreciate the strategy until the early-1990s after working on the sell side of the investment industry, and it still took me a few more years before I finally dropped all active investing entirely and switched to a fully passive approach. That was the wisest investment decision I ever made, and one of the most calming moments I recall in my investing career. As with more investors, I was completely at ease with my decision to implement a completely passive investment approach. The Endowment Effect The endowment effect occurs when an investor believes that what they own is superior to something they don’t own even though that belief is demonstratively not true.11 The owners of poorly performing actively managed mutual funds value them more than non-owners. Many people will cling to an actively managed mutual fund that has performed poorly because they see better performance down the road even though there’s nothing relevant on which to base that prediction.12 There is a tendency of investors to hold losing investments too long and sell winning investments too soon.

Nor was it justified by subsequent portfolio performance.13 Selling a loser is admitting an investment mistake. Many investors would rather hold their losing investments and wait for them to recover rather than take the loss and switch into a different strategy. I see the endowment effect at work in the investment management business. The number of new client inquiries declines sharply during a bear market as people reject the idea of changing strategies until they make up some of their loses. Taxable investors are handicapped by the endowment effect because a bear market is the ideal time to sell losing investments and switching their strategy. This period creates the lowest capital gains and generates the greatest amount of tax losses. Tax losses can be used to offset capital gains in the future and lower taxable ordinary income.

See American Stock Exchange (Amex) AQR Capital Management Art of Selling Intangibles, The (Gross) Asness, Cliff Assessments Asset allocation strategy: in 5-step process active asset classes and individual investors and for an IPS market conditions and passive risk/return assessment in strategic tactical Asset class: long-term expected risk/returns non-core asset classes volatility of Assets under management (AUM) AUM. See Assets under management (AUM) Bad accounting Banz, Rolf Barclays Capital Aggregate Bond Index Barra Inc. Basu, Sanjoy Batterymarch Financial Management Beardstown Ladies, the Bear market: advisors and endowment effect and market timing gaps and policy changes and risk and Beat-the-market advice Behavioral finance Benchmarking, improper Benchmark(s): buying defining good definition of identification of proper index funds and strategy index products and Benchmarks and Investment Management (Siegel) Benefits, passive index investing Berkshire Hathaway Inc. Bernstein, Peter Bernstein, William Beta (β): alpha (α) and coining of term Beta, firm size, and value (BtM) Beta seeking index Blake, Christopher Boggle’s Folly Bogle, John Clifton Bogleheads’ Guide to Investing, The (Larimore, Lindauer, and LeBoeuf) Bogleheads’ Guide to Retirement Planning, The Bond fund(s): fee characteristics of persistence of performance turnover rates and volatility and Bond index funds Bond-specific risk factors Book-to-market (BtM) Boston Globe Box Score Report (BSR) Brandeis, Louis D.


pages: 335 words: 94,657

The Bogleheads' Guide to Investing by Taylor Larimore, Michael Leboeuf, Mel Lindauer

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asset allocation, buy low sell high, corporate governance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, estate planning, financial independence, financial innovation, high net worth, index fund, late fees, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, market bubble, mental accounting, money market fund, passive investing, Paul Samuelson, random walk, risk tolerance, risk/return, Sharpe ratio, statistical model, survivorship bias, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

If you have a hard time pulling the trigger on investment decisions, remember that investing is like basketball in this respect: You miss 100 percent of the shots you don't take. The Endowment Effect Many of us have a tendency to confuse the familiar with the safe and overrate the value of what we already own. That's the endowment effect. One common investment mistake caused by the endowment effect is when employees invest the bulk of their money in their employer's stock. If you believe this is a prudent thing to do, ask former employees of Enron. The employee who does this is already investing half or more of her waking hours in the company. On top of that, she is now betting a large chunk of her monetary investments on the company too. To call her undiversified is an understatement. Another common practice caused by the endowment effect is to buy only domestic funds in the belief that U.S. investments are safer.

Once again, consider the lessons from the Dalbar study about mutual fund investor performance. Following the herd will likely earn you negative real returns. The sad truth is that when it comes to investing, you can follow the herd to the slaughterhouse. Herd investors have certain traits. They don't have a sound investment plan, they listen to the noise, buy and sell at the wrong times, and have no idea how badly they underperform the market. In fact, thanks to the endowment effect, most believe their investments are performing far better than they actually are. Call it The Beardstown Ladies Effect. Since most believe they're above average, they conclude that their returns are above average, too. Mental Accounting This emotional trap causes us to be poor savers, rather than poor investors. Nevertheless, since you can't invest what you don't save, it's a habit to be aware of.

This means you and/or the person investing your money. • Loss aversion. Be a risk manager instead of a risk avoider. Believing you are avoiding risk can be a costly illusion. • Paralysis by analysis. Every day you don't invest is a day less you'll have the power of compounding working for you. Put together an intelligent investment plan and get started. If you need help, seek out a good financial planner to assist you. • The endowment effect. Just because you own it, or are a part of it, doesn't automatically mean it's worth more. Get an objective evaluation. Invest no more than 10 percent of your portfolio in your employer's stock. • Mental accounting. Remember that all money spends the same, regardless of where it comes from. Money already spent is a sunk cost and should play no part in making future decisions. • Anchoring.


pages: 336 words: 113,519

The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis

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Albert Einstein, availability heuristic, Cass Sunstein, choice architecture, complexity theory, Daniel Kahneman / Amos Tversky, Donald Trump, Douglas Hofstadter, endowment effect, feminist movement, framing effect, hindsight bias, John von Neumann, Kenneth Arrow, loss aversion, medical residency, Menlo Park, Murray Gell-Mann, Nate Silver, New Journalism, Paul Samuelson, Richard Thaler, Saturday Night Live, statistical model, the new new thing, Thomas Bayes, Walter Mischel, Yom Kippur War

Especially when offered the chance to trade one of their NBA players for another team’s draft picks, they’d refused deals they should have done. Why? They hadn’t done it consciously. Morey thus became aware of what behavioral economists had labeled “the endowment effect.” To combat the endowment effect, he forced his scouts and his model to establish, going into the draft, the draft pick value of each of their own players. The next season, before the trade deadline, Morey got up before his staff and listed on a whiteboard all the biases he feared might distort their judgment: the endowment effect, confirmation bias, and others. There was what people called “present bias”—the tendency, when making a decision, to undervalue the future in relation to the present. There was “hindsight bias”—which he thought of as the tendency for people to look at some outcome and assume it was predictable all along.

Why add to your misery? “I said, ‘C’mon, don’t you know about sunk cost?’” recalled Thaler. His friend was a computer scientist and didn’t know about sunk cost. After Thaler explained the concept, his friend just looked at him and said, “Oh, that’s just a bunch of bullshit.” Thaler’s list grew quickly. A lot of the items on it fell into a bucket that he eventually would label “The Endowment Effect.” The endowment effect was a psychological idea with economic consequences. People attached some strange extra value to whatever they happened to own, simply because they owned it, and so proved surprisingly reluctant to part with their possessions, or endowments, even when trading them made economic sense. But in the beginning, Thaler wasn’t thinking in categories. “At the time, I’m just collecting a list of stupid things people do,” he said.

Why were NFL teams so reluctant to trade their draft picks when it was obvious that they could often get more than the players were worth in exchange? Why were investors so reluctant to sell stocks that had fallen in value, even when they admitted that they would never buy those stocks at their current market prices? There was no end of things people did that economic theory had trouble explaining. “When you start looking for the endowment effect,” Thaler said, “you see it everywhere.” His feelings about his own field were not so very different from his feelings for Monopoly as a kid: It was boring, and unnecessarily so. Economics was meant to be the study of an aspect of human nature, but it had ceased to pay attention to human nature. “Thinking about this stuff was way more interesting than doing economics,” he said. When he called his observations to the attention of his fellow economists, they weren’t interested.


pages: 383 words: 108,266

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

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air freight, Al Roth, Bernie Madoff, Burning Man, butterfly effect, Cass Sunstein, collateralized debt obligation, computer vision, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, endowment effect, financial innovation, fudge factor, Gordon Gekko, greed is good, housing crisis, invisible hand, lake wobegon effect, late fees, loss aversion, market bubble, Murray Gell-Mann, payday loans, placebo effect, price anchoring, Richard Thaler, second-price auction, Silicon Valley, Skype, The Wealth of Nations by Adam Smith, Upton Sinclair

James Heyman, Yesim Orhun, and Dan Ariely, “Auction Fever: The Effect of Opponents and Quasi-Endowment on Product Valuations,” Journal of Interactive Marketing (2004). RELATED READINGS Richard Thaler, “Toward a Positive Theory of Consumer Choice,” Journal of Economic Behavior and Organization (1980). Jack Knetsch, “The Endowment Effect and Evidence of Nonreversible Indifference Curves,” American Economic Review, Vol. 79 (1989), 1277–1284. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” Journal of Political Economy (1990). Daniel Kahneman, Jack Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives, Vol. 5 (1991), 193–206. Chapter 8: Keeping Doors Open BASED ON Jiwoong Shin and Dan Ariely, “Keeping Doors Open: The Effect of Unavailability on Incentives to Keep Options Viable,” Management Science (2004).

But when the lottery was over, some of them would become ticket owners, while others would not. The question was this: would the students who had won tickets—who had ownership of tickets—value those tickets more than the students who had not won them even though they all “worked” equally hard to obtain them? On the basis of Jack Knetsch, Dick Thaler, and Daniel Kahneman’s research on the “endowment effect,” we predicted that when we own something—whether it’s a car or a violin, a cat or a basketball ticket—we begin to value it more than other people do. Think about this for a minute. Why does the seller of a house usually value that property more than the potential buyer? Why does the seller of an automobile envision a higher price than the buyer? In many transactions why does the owner believe that his possession is worth more money than the potential owner is willing to pay?

., xxviii–xxx, 239–40 cost-benefit analysis in, 64–65 human rationality assumed in, xxix, xxx, 239–40 supply and demand in, 45–46 Economist subscription offers, 1–3, 4–6, 9–10 education, 84–86 igniting social passion for, 85–86 “No Child Left Behind” policy and, 85 “elderly,” behavior affected by priming concept of, 170–71 e-mail addiction, 255–59 overcoming, 259 reinforcement schedules and, 257–59 empirical tests: public policy and, 328–29 in science, xxv–xxvi, 325 employees: payment of, see compensation; salaries social vs. market norms in companies’ relations with, 80–84, 252–54 theft and fraud at workplace ascribed to, 195–96 endowment effect, 129–35 energy drinks, impact of price and hype on efficacy of, 184–87 Enron scandal, xiv, 196, 204, 219 envy, comparisons and, 15–19 epidurals, 103–4 Escape from Freedom (Fromm), 148 Europe, savings rate in, 109 evolution, dangers of globalization and, 317–18, 319 exercise, procrastination and, 111 expectations, 155–72, 269–75 art and, 274 beer experiments and, 157–59, 161–62, 163–64, 172 brand associations of Coke and Pepsi and, 166–68 conflicts and, 156–57, 171–72 depth of description in caterers’ offerings and, 164 exotic-sounding ingredients and, 164–65 football plays and, 155–56, 171 garage sales and, 162–63 knowledge before vs. after experience and, 161–64 marketing hype and, 186–87 music and, 270–73, 274 physiology of experience altered by, 161–64, 166–68, 293–94 placebo effect and, 173–94; see also placebo effect restaurant meals and, 269–70 sports car test drives and, 161 stereotypes and, 168–71 taste and, 157–68, 270 upscale coffee ambience and, 159–60 wineglasses and, 165 expense reports, dishonesty in, 223–24 experience, not learning from, xxvii experiments: extrapolation of findings in, xxxi–xxxii isolating individual forces in, xxxi see also empirical tests; specific topics F Fannie Mae, 280, 310 Fastow, Andrew, 219 Federal Depositor Insurance Corporation (FDIC), 280 Federal Reserve, 280, 284–85 Fehr, Ernst, 307–8 financial industry: conflicts of interest and, 295–96 globalization and loss of diversity in, 318–19 inherent fuzziness in, 294–95 profit made from our mistakes by, 298–304 regulation of, 296 see also bankers financial meltdown of 2008, 279–329 bailout plan and, 280, 304–6, 310–11, 312, 314, 319–20 bankers’ behavior in, 291–96 collapse of financial institutions in, 280–81, 314 compensation for bankers and, 306, 310, 311, 319–24 conflicts of interest and, 291–96 empirical testing of approaches to, 328–29 global market and, 316–19 Greenspan’s confession and, xvii-xix housing market collapse and, 265–66, 279 learned helplessness and, 314–16 limitations of rational economics and, 281–82, 324–28 media coverage of, 315–16 mortgage practices and, 279–80, 283–90 planning fallacy and, 297–304 psychological fallout from not understanding what’s going on in, 311–16 public trust and, 304–11 shared suffering in, 303 fines, in social context, 76–77 first decisions: power of, 44 shape of our lives and, 43 translation of, into long-term habits, 36–39 see also anchoring first impressions: imprinting and, 25, 34, 43 see also arbitrary coherence Fiske, Alan, 68 food: expectations and taste of, 164–65, 270 ordering process and enjoyment of, 237–38 see also taste food labels, allure of “zero” on, 61–62 football plays, expectations and perception of, 155–56, 171 Ford Motor Company, 119–21 401(k)s, xiii France, Amazon’s FREE!


pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

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accounting loophole / creative accounting, air freight, Albert Einstein, Alvin Roth, assortative mating, banking crisis, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, computer vision, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, end world poverty, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, fudge factor, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, Jean Tirole, job satisfaction, Kenneth Arrow, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, new economy, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, second-price auction, shareholder value, Silicon Valley, Skype, software as a service, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, ultimatum game, Upton Sinclair, Walter Mischel, young professional

James Heyman, Yesim Orhun, and Dan Ariely, “Auction Fever: The Effect of Opponents and Quasi-Endowment on Product Valuations,” Journal of Interactive Marketing (2004). RELATED READINGS Richard Thaler, “Toward a Positive Theory of Consumer Choice,” Journal of Economic Behavior and Organization (1980). Jack Knetsch, “The Endowment Effect and Evidence of Nonreversible Indifference Curves,” American Economic Review, Vol. 79 (1989), 1277–1284. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” Journal of Political Economy (1990). Daniel Kahneman, Jack Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives, Vol. 5 (1991), 193–206. Chapter 9: Keeping Doors Open BASED ON Jiwoong Shin and Dan Ariely, “Keeping Doors Open: The Effect of Unavailability on Incentives to Keep Options Viable,” Management Science (2004).

Ziv Carmon and Dan Ariely, “Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers,” Journal of Consumer Research 27, no. 3 (2000): 360–370. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5, no. 1 (1991): 193–206. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” The Journal of Political Economy 98, no. 6 (1990): 1325–1348. Jack Knetsch, “The Endowment Effect and Evidence of Nonreversible Indifference Curves,” The American Economic Review 79, no. 5 (1989): 1277–1284. Justin Kruger, Derrick Wirtz, Leaf Van Boven, and T. William Altermatt, “The Effort Heuristic,” Journal of Experimental Social Psychology 40, no. 1 (2004): 91–98.

Given the arm’s limited functionality, the pain I experienced and am still experiencing, and what I now know about flawed decision making, I suspect that keeping my arm was, in a cost/benefit sense, a mistake. Let’s look at the biases that affected me. First, it was difficult for me to accept the doctors’ recommendation because of two related psychological forces we call the endowment effect and loss aversion. Under the influence of these biases, we commonly overvalue what we have and we consider giving it up to be a loss. Losses are psychologically painful, and, accordingly, we need a lot of extra motivation to be willing to give something up. The endowment effect made me overvalue my arm, because it was mine and I was attached to it, while loss aversion made it difficult for me to give it up, even when doing so might have made sense. A second irrational influence is known as the status quo bias. Generally speaking, we tend to want to keep things as they are; change is difficult and painful, and we’d rather not change anything if we can help it.


pages: 384 words: 118,572

The Confidence Game: The Psychology of the Con and Why We Fall for It Every Time by Maria Konnikova

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attribution theory, Bernie Madoff, British Empire, Cass Sunstein, cognitive dissonance, Daniel Kahneman / Amos Tversky, endowment effect, epigenetics, hindsight bias, lake wobegon effect, libertarian paternalism, Milgram experiment, placebo effect, Ponzi scheme, publish or perish, Richard Thaler, risk tolerance, side project, Skype, Steven Pinker, the scientific method, tulip mania, Walter Mischel

A thing which you enjoyed and used as your own for a long time, whether property or opinion, takes root in your being and cannot be torn away without your resenting the act and trying to defend yourself, however you came by it. The law can ask no better justification than the deepest instincts of man.” In psychology, that idea is called the endowment effect, first articulated by Thaler in 1980. By virtue of being ours, our actions, thoughts, possessions, and beliefs acquire a glow they didn’t have before we committed to them. Sunk costs make us loath to spot problems and reluctant to swerve from a committed path. And the endowment effect imbues the status quo—what we’ve done—with an overly optimistic and rosy glow. It makes us want to hold on to it all the more. Those mysterious paintings start looking all the more real once they’ve been hanging on the walls of your home—Freedman herself purchased two, hanging them prominently in her entryway.

He had refused—although he’d equally refused to buy any additional bottles at the new, “crazy” price. He wasn’t going to get that much additional enjoyment out of them—he simply didn’t think a wine could ever justify such a price tag. He was, the behavioral economists concluded, suffering from both an endowment effect—to him, the bottles were worth even more than $200 simply because they were his, though the exact same wine bought anew would be worth substantially less—and a status quo bias—the tendency to leave things as they are, neither buying nor selling, but simply continuing on as is. Experimentally, the endowment effect is remarkably well documented. Repeatedly, people who don’t own something—say, a pen or a mug, two items often used in these studies—will be willing to pay less for it than they would to sell the exact same object. Take this example, from one of Kahneman and Thaler’s many studies.

Even still, fewer than 40 percent of the participants made the trade. The number fell to a low of just over a quarter—27 percent—when the possibility of regret was raised explicitly: there would be a public drawing, and a prior owner would know if her ticket had actually won. Even if the ticket was completely withdrawn from consideration—it couldn’t win, no matter what—fewer than half were willing to give it up. It wasn’t just about what is known as the endowment effect—the fact that we value what we already have more than what we don’t—Bar-Hillel and Neter concluded. The possibility of regret loomed so strongly on the chance that the player had given up a winner that it overcame all rational considerations. Trading pens instead of lottery tickets, in fact—an object without any uncertainty surrounding its value—yielded a 90 percent compliance rate. It wasn’t about letting go of what you had.

Quantitative Trading: How to Build Your Own Algorithmic Trading Business by Ernie Chan

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algorithmic trading, asset allocation, automated trading system, backtesting, Black Swan, Brownian motion, business continuity plan, compound rate of return, Edward Thorp, Elliott wave, endowment effect, fixed income, general-purpose programming language, index fund, John Markoff, Long Term Capital Management, loss aversion, p-value, paper trading, price discovery process, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Ray Kurzweil, Renaissance Technologies, risk-adjusted returns, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, systematic trading, transaction costs

Fortunately, there is a field of financial research called “behavioral finance” (Thaler, 1994) that studies irrational financial decision making. I will try to highlight a few of the common irrational behaviors that affect trading. The first behavioral bias is known variously as the endowment effect, status quo bias, or loss aversion. The first two effects cause some traders to hold on to a losing position for too long, because traders (and people in general) give too much preference to the status quo (the status quo bias), or because they demand much more P1: JYS c06 JWBK321-Chan September 24, 2008 Money and Risk Management 13:57 Printer: Yet to come 109 to give up the stock than what they would pay to acquire it (the endowment effect). As I argued in the risk management section, there are rational reasons to hold on to a losing position (e.g., when you expect mean-reverting behavior); however, these behavioral biases cause traders to hold on to losing positions even when there is no rational reason (e.g., when you expect trending behavior, and the trend is such that your positions will lose even more).

See Seasonal trading strategies Capacity, 27, 158 Capital availability, effect on choices, 15 Capital allocation, optimal, 95–103 Capital IQ, 136 Chicago Mercantile Exchange (CME), 16 Clarifi, 35 CNBC Plus, 76 Cointegrating augmented Dickey-Fuller test, 128 Cointegration, 126–133 forming a good cointegrating pair of stocks, 128–130 Compustat, 136 Contagion, financial, 104–105 Correlation, 131 Covariance matrix, 97 CSIdata.com, 37 CRSP.com, 37 D Dark-pool liquidity, 71, 73, 88 Data mining, 121 Databases, historical, 37 Data-snooping bias, 25–27, 52–60, 91 out-of-sample testing, 53–55 sample size, 53 sensitivity analysis, 60 and underperformance of live trading, 91 Decimalization of stock prices, 91, 120 Printer: Yet to come INDEX Deleveraging, 152 Despair, 110 Disasters, physical or natural, 108 Discovery (Alphacet), 35, 36, 55, 85, 122–126 charting application, 125 Dollar-neutral portfolio, 43–44 Dow Jones, 36, 75 Drawdown, 20, 21–22, 43, 95 maximum, 21 calculating, 48–50 maximum duration, 21 calculating, 48–50 DTN.com, 37 Dynamic data exchange (DDE) link, 80, 81–82, 83, 84, 85 E ECHOtrade, 70 Econometrics toolbox, 168 The Economist, 10 Elite Trader, 10, 74 Elliott wave theory, 116 E-mini S&P 500 future, 16 Endowment effect, 108–109 Equity curve, 20 Excel, 3, 21, 32, 51, 163 dynamic data exchange (DDE) link to, 80, 81–82, 83, 84, 85 using in automated trading systems, 80, 81, 83, 84, 85 using to avoid look-ahead bias, 51 using to calculate maximum drawdown and maximum drawdown duration, 48 using to calculate Sharpe ratio for long-only strategies, 45–46, 47 P1: JYS ind JWBK321-Chan October 2, 2008 14:7 Printer: Yet to come 177 Index Execution systems, 79–94 automated trading system, advantages of, 79–87 fully automated trading system, building a, 84–87 semiautomated trading system, building a, 81–84 paper trading, testing your system by, 89–90 performance, divergence from expectations, 90–92 transaction costs, minimizing, 87–88 Exit strategy, 140–143 F Factor exposure, 134 Factor models, 133–139 principal component analysis as an example of, 136–139 Factor return, 134 FactSet, 35, 36 Fama-French Three-Factor model, 134–135, 153 Financial web sites and blogs, 10 G GainCapital.com, 37 GARCH toolbox, 168 Gasoline futures, seasonal trade in, 148–151 Gaussian probability distributions, 96, 105 derivation of Kelly formula in, 112–113 Generalized autoregressive conditional heteroskedasticity (GARCH) model, 120 Genesis Securities, 70, 73, 82 Global Alpha fund (Goldman Sachs), 104 Greed, 110–111 H “Half-Kelly” betting, 98, 105–106 High-frequency trading strategies, 151–153 transaction costs, importance of in testing, 152 High-leverage versus high-beta portfolio, 153–154 High watermark, 21, 48 Historical databases errors in, 117 finding and using, 36–43 high and low data, use of, 42–43 split and dividend-adjusted data, 36–40 survivorship bias, 40–42 HQuotes.com, 37, 81 Hulbert, Mark (New York Times), 10 I Information ratio.


pages: 304 words: 22,886

Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein

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Al Roth, Albert Einstein, asset allocation, availability heuristic, call centre, Cass Sunstein, choice architecture, continuous integration, Daniel Kahneman / Amos Tversky, desegregation, diversification, diversified portfolio, endowment effect, equity premium, feminist movement, fixed income, framing effect, full employment, George Akerlof, index fund, invisible hand, late fees, libertarian paternalism, loss aversion, Mahatma Gandhi, Mason jar, medical malpractice, medical residency, mental accounting, meta analysis, meta-analysis, Milgram experiment, money market fund, pension reform, presumed consent, profit maximization, rent-seeking, Richard Thaler, Right to Buy, risk tolerance, Robert Shiller, Robert Shiller, Saturday Night Live, school choice, school vouchers, transaction costs, Vanguard fund, Zipcar

In Gilovich, Griffin, and Kahneman (2002), 49–81. BIBLIOGRAPHY Kahneman, Daniel, Barbara L. Fredrickson, Charles A. Schreiber, and Donald A. Redelmeier. “When More Pain Is Preferred to Less: Adding a Better End.” Psychological Science 4 (1993): 401–5. Kahneman, Daniel, Jack L. Knetsch, and Richard H. Thaler. “Experimental Tests of the Endowment Effect and the Coase Theorem.” Journal of Political Economy 98 (1990): 1325–48. ———. “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias.” Journal of Economic Perspectives 5, no. 1 (1991): 193–206. Kahneman, Daniel, and Richard H. Thaler. “Anomalies: Utility Maximization and Experienced Utility.” Journal of Economic Perspectives 20, no. 1 (2006): 221–34. Kahneman, Daniel, and Amos Tversky, eds. Choices, Values, and Frames. Cambridge: Cambridge University Press, 2000.

“Availability: A Heuristic for Judging Frequency and Probability.” Cognitive Psychology 5 (1973): 207–32. ———. “Judgment Under Uncertainty: Heuristics and Biases.” Science 185 (1974): 1124–31. ———. “The Framing of Decisions and the Psychology of Choice.” Science 211 (1981): 453–58. Van Boven, Leaf, David Dunning, and George Loewenstein. “Egocentric Empathy Gaps Between Owners and Buyers: Misperceptions of the Endowment Effect.” Journal of Personal and Social Psychology 79 (2000): 66–76. Van Boven, Leaf, and George Loewenstein. “Social Projection of Transient Drive States.” Personality and Social Psychology Bulletin 29 (2003): 1159–68. Van De Veer, Donald. Paternalistic Intervention: The Moral Bounds on Benevolence. Princeton: Princeton University Press, 1986. Vaughan, William, and Delani Gunawardena. “Letter to CMS Acting Administrator Leslie Norwalk.”

., 86 defined-benefit retirement plans, 105, 108 defined-contribution retirement plans, 105–6, 107, 123, 128, 129 design: controlled by choice architects, 10; details of, 3–4; human factors incorporated into, 82, 83; informed, 240; neutral, 3, 10; starting points inherent in, 10–11; user-friendly, 11 Design of Everyday Things, The (Norman), 83 Destiny Health Plan, 233 difficulty, degree of, 73–74 digital cameras, 90, 92–93 discount pricing, 36 discrimination, laws against, 251 Disulfiram (antabuse), 234–35 diversification heuristic, 123 divorce: and “above average” effect, 32, 224; and children, 225, 226; difficulty of obtaining, 219–20; economic prospects affected by, 224; law of, 224–26; mandatory waiting period for, 250–51; obtainable at will, 220 Doers, 42, 47 dog owners, social pressures on, 54 Dollar a day incentive, 234 domestic partnership agreements, 215–16, 223 “Don’t Mess with Texas,” 60, 61 eating: and conformity, 64; and food display, 1–3, 4–5, 10, 11, 165–66; and food selection, 7, 64; gender differences in, 64 Economist, 239–40 Econs: easy choices for, 77; homo economicus, 6–8; incentives for, 8; investment 285 286 INDEX Econs (continued ) decisions by, 120; and money, 101; not followers of fashion, 53; Reflective Systems used by, 22; unbiased forecasts made by, 7; use of term, 7 education, 199–206; accountability in, 200; in Boston, 203–5; in Charlotte, 202; charter schools, 200; child’s right to, 199, 206; and competition, 199– 200; complex choices in, 200–203; controlled choice in, 203–5; desegregation of, 203; incentive conflicts in, 203–5; No Child Left Behind, 85–86, 200– 201; in San Marcos, Texas, 205–6; school choice vouchers, 199–200, 203, 206; status quo bias in, 201–2; testing standards, 200; test scores, 200, 202; underperforming in, 201; in Worcester, 200–201 “efficient frontier,” 154 Einstein, Albert, 6 elimination by aspects, 95 emails, Civility Check for, 235 Emanuel, Rahm, 14 Emergency Planning and Community Right to Know Act (1986), 190 “emoticons,” 68, 69 employers: employee benefits offered by, 11–13; profit-sharing plans of, 128; and retirement plans, 105–6, 107–8, 111, 127, 128, 131 endowment effect, 83 energy, invisibility of, 194 energy conservation: and cost-disclosing thermostats, 99; and framing, 36–37; and home-building industry, 192–93; and social influences, 68–69; voluntary participation programs in, 194–96 energy efficiency, 195–96 Energy Star Office Products, 195–96 Enron Corporation, 125–26, 127 environmental issues, 158, 183–96; acid deposition program, 187–88; air pollution, 183, 184–85, 186, 188; auto emissions, 184, 186; auto fuel economy, 191– 92, 192, 193; cap-and-trade system in, 187, 197; Clean Air Act, 187; climate change, 183, 186, 191, 196; commandand-control regulation of, 184, 186, 189; energy conservation, 36–37, 68– 69, 99, 192–93, 194–96; energy efficiency, 195–96; energy use, 193–96; feedback and information, 188–93; greenhouse gas emissions, 186, 188, 196; incentives for, 185–88; international, 183, 187; Kyoto Protocol, 187; nudges proposed for, 193–96; ozone layer, 183; recycling, 66n; risk labeling, 189; and social influences, 68–69; trading systems in, 187–88, 197; and tragedy of the commons, 185; transparent costs of, 187; voluntary participation programs, 194–96 Environmental Protection Agency (EPA), 189; and auto fuel economy, 192, 192, 193; Energy Star Office Products program, 195–96; Green Lights program of, 195–96; Toxic Release Inventory of, 190 – 91 Equities (stocks), 118, 119–20 equity premium, 120 ERISA (Employee Retirement Income Security Act of 1974), 127–28, 131 error, expecting, 87–90, 130 “everything matters,” 3–4 evil nudgers, 239–41 expectations, 62 Experion Systems, 173 externalities, 184 FAFSA (free application for federal student aid), 139, 141 families, dispersion of, 104 Family and Medical Leave Act, 216 Federal Express, 208 Federal Housing Administration (FHA), 133–34 Federal Trade Commission (FTC), 250 feedback, 75, 90–91, 131, 188–93 529 plans (college savings accounts), 141 flexible spending accounts, 12 follow through, failure to, 112 Food and Drug Administration (FDA), 189 INDEX food display, 1–3, 4–5, 10, 11, 165–66 food selection, 7, 64 footnotes, uses of, 4n forced choice, 86, 109–10, 243 forcing function, 88 Ford, Harrison, 154 401(k) plans, 106, 107, 109, 126, 127, 128, 130 framing, 36–37 France, organ donations in, 179 Franklin, Benjamin, 47 freedom of choice, 5, 197, 252–53; danger of overreaching, 240; elimination of, 248–51; Just Maximize Choices, 9–11; opposition to, 241–43; and presumed consent, 177–79; and required choice, 86–87 frequency, 74–75 Friedman, Milton, 5, 199, 206 friendly discouragement, 201 fungibility, 50–523 gains and losses, 33–34 gambling, 33–34; low stakes, 74-75n; mental accounting in, 50–51; self-bans, 233; and strategy, 45–47 Gandhi, Mohandas, 6 gas tank caps, 88–89 Gateway Arch, St.


pages: 297 words: 96,509

Stumbling on Happiness by Daniel Gilbert

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Albert Einstein, cognitive dissonance, Drosophila, endowment effect, impulse control, indoor plumbing, loss aversion, mental accounting, meta analysis, meta-analysis, Necker cube, Ronald Reagan, science of happiness, The Wealth of Nations by Adam Smith

Tversky and D. Kahneman, “Loss Aversion in Riskless Choice: A Reference-Dependent Model,” Quarterly Journal of Economics 106: 1039–61 (1991). 35. D. Kahneman, J. L. Knetsch, and R. H. Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” Journal of Political Economy 98: 1325–48 (1990); and D. Kahneman, J. Kentsch, and D. Thaler, “The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5: 193–206 (1991). 36. L. van Boven, D. Dunning, and G. F. Loewenstein, “Egocentric Empathy Gaps Between Owners and Buyers: Misperceptions of the Endowment Effect,” Journal of Personality and Social Psychology 79: 66–76 (2000); and Z. Carmon and D. Ariely, “Focusing on the Foregone: How Value Can Appear So Different to Buyers and Sellers,” Journal of Consumer Research 27: 360–70 (2000). 37.

Rabin, “Projection Bias in Predicting Future Utility,” Quarterly Journal of Economics 118: 1209–48 (2003); G. Loewenstein and E. Angner, “Predicting and Indulging Changing Preferences,” in Time and Decision, ed. G. Loewenstein, D. Read, and R. F. Baumeister (New York: Russell Sage Foundation, 2003), 351–91; L. van Boven, D. Dunning, and G. F. Loewenstein, “Egocentric Empathy Gaps Between Owners and Buyers: Misperceptions of the Endowment Effect,” Journal of Personality and Social Psychology 79: 66–76 (2000). 14. R. E. Nisbett and D. E. Kanouse, “Obesity, Food Deprivation and Supermarket Shopping Behavior,” Journal of Personality and Social Psychology 12: 289–94 (1969); D. Read and B. van Leeuwen, “Predicting Hunger: The Effects of Appetite and Delay on Choice,” Organizational Behavior and Human Decision Processes 76: 189–205 (1998). 15.


pages: 297 words: 96,509

Time Paradox by Philip, John Boyd Zimbardo

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Albert Einstein, cognitive dissonance, Drosophila, endowment effect, impulse control, indoor plumbing, loss aversion, mental accounting, meta analysis, meta-analysis, Necker cube, Ronald Reagan, science of happiness, The Wealth of Nations by Adam Smith

Tversky and D. Kahneman, “Loss Aversion in Riskless Choice: A Reference-Dependent Model,” Quarterly Journal of Economics 106: 1039–61 (1991). 35. D. Kahneman, J. L. Knetsch, and R. H. Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” Journal of Political Economy 98: 1325–48 (1990); and D. Kahneman, J. Kentsch, and D. Thaler, “The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5: 193–206 (1991). 36. L. van Boven, D. Dunning, and G. F. Loewenstein, “Egocentric Empathy Gaps Between Owners and Buyers: Misperceptions of the Endowment Effect,” Journal of Personality and Social Psychology 79: 66–76 (2000); and Z. Carmon and D. Ariely, “Focusing on the Foregone: How Value Can Appear So Different to Buyers and Sellers,” Journal of Consumer Research 27: 360–70 (2000). 37.

Rabin, “Projection Bias in Predicting Future Utility,” Quarterly Journal of Economics 118: 1209–48 (2003); G. Loewenstein and E. Angner, “Predicting and Indulging Changing Preferences,” in Time and Decision, ed. G. Loewenstein, D. Read, and R. F. Baumeister (New York: Russell Sage Foundation, 2003), 351–91; L. van Boven, D. Dunning, and G. F. Loewenstein, “Egocentric Empathy Gaps Between Owners and Buyers: Misperceptions of the Endowment Effect,” Journal of Personality and Social Psychology 79: 66–76 (2000). 14. R. E. Nisbett and D. E. Kanouse, “Obesity, Food Deprivation and Supermarket Shopping Behavior,” Journal of Personality and Social Psychology 12: 289–94 (1969); D. Read and B. van Leeuwen, “Predicting Hunger: The Effects of Appetite and Delay on Choice,” Organizational Behavior and Human Decision Processes 76: 189–205 (1998). 15.


pages: 295 words: 66,824

A Mathematician Plays the Stock Market by John Allen Paulos

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Benoit Mandelbrot, Black-Scholes formula, Brownian motion, business climate, butterfly effect, capital asset pricing model, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, intangible asset, invisible hand, Isaac Newton, John Nash: game theory, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Myron Scholes, Nash equilibrium, Network effects, passive investing, Paul Erdős, Paul Samuelson, Ponzi scheme, price anchoring, Ralph Nelson Elliott, random walk, Richard Thaler, Robert Shiller, Robert Shiller, short selling, six sigma, Stephen Hawking, survivorship bias, transaction costs, ultimatum game, Vanguard fund, Yogi Berra

Surprisingly, however, if the subjects are told that they’ve inherited the money but it is already in the form of municipal bonds, almost half choose to keep it in bonds. It’s the same with the other three investment options: Almost half elect to keep the money where it is. This inertia is part of the reason so many people sat by while not only their inheritances but their other investments dwindled away. The “endowment effect,” another kindred bias, is an inclination to endow one’s holdings with more value than they have simply because one holds them. “It’s my stock and I love it.” Related studies suggest that passively endured losses induce less regret than losses that follow active involvement. Someone who sticks with an old investment that then declines by 25 percent is less upset than someone who switches into the same investment before it declines by 25 percent.

Ebbers, Bernie acquisition appetite of arrogance of author emails offer of help Digex purchase down-home style of forced to sell WCOM stock fraud by pump and dump strategy and purchase of WorldCom stock by economics, human behavior and The Education of a Speculator (Niederhoffer) “efficient frontier” of portfolios (Markowitz) Efficient Market Hypothesis background of impact of accounting scandals on increased efficiency results in decreased predictability investors beliefs impacting moving averages and paradoxes of randomness and rationale for resistance and support levels and versions of Elliott, Ralph Nelson Ellison, Larry employee remuneration vs. CEO remuneration endowment effect Enron accounting practices margin calls on CEO Ken Lay environmental exploitation, as Ponzi scheme equity-risk premium Erdös, Paul Escher, M. C. European stock market euros benefits of standardizing European currencies euro-pound/pound-euro exchange rate expected excess return expected value. see also mean value covariance and formula for obtaining graphing against risk (Markowitz optimal portfolios) insurance company example “maximization of expected value,” mu (m) probability theory and exploitable opportunities, tendency to disappear Fama, Eugene Fibonacci numbers Elliott wave theory and golden ratio and fibre-optic cable fifty-two-week highs “flocking effect,” Internet Fooled by Randomness (Taleb) formulas Black-Scholes options compound interest expected value fractals Frank, Robert fraud. see also accounting scandals applying Benford’s Law to corporate fraud applying Benford’s law to income tax fraud Bernie Ebbers Salomon Smith Barney benefitting illegally from IPOs WCOM fraud wrongdoing of brokers at Merrill Lynch free market economy French, Ken Full House: The Spread of Excellence from Plato to Darwin (Gould) fund managers. see also stock brokers/analysts fundamental analysis determining fundamental value by discounting process evidence supporting present value and sequence complexity and trading rules and as sober investment strategy stock valuation with unexciting nature of future value P/E ratio as measure of future earnings expectations present value and gambler’s fallacy games gambling and probability game theory guessing games Monopoly Parrondo’s paradox St.

technical analysis trading strategies unemployment whim World Class Options Market Maker (WCOMM) present value compound interest and discounting process for stock purchases based on price movements complexity changes over time extreme movements herd-like and volatile nature of insider trading and network effect on normal curve and power law and subterranean information processing and price, P/E ratio price targets anchoring effect and hype and unrealistic prices, of stocks manipulating for own benefit (management/CEO) oscillation created by investor reactions to each other reflecting publicly available information prisoner’s dilemma private information becoming common knowledge dynamic with common knowledge market predictions and probability coin flipping game and dice and gambling games games of chance outguessing the average guess St. Petersburg paradox stock-newsletter scam based on stock options and probability theory progressive taxation psychology anchoring effect availability error behind buying more stock as price drops confirmation bias counterproductive behavior endowment effect scandal cover-ups status quo bias trying to outguess the masses publicly available information. see also common knowledge accounting scandals and Efficient market hypothesis and pump and dump strategy put options. see also stock options buying/selling puts on S&P as hedge against decline of stock selling strategies for using valuation tools for pyramid schemes quarterly estimates RagingBull railroads, depression of Ramsey, Frank random events appearance of order in Efficient market hypothesis and investing with meaning vs. predictability random sequences A Random Walk Down Wall Street (Malkiel) random walk theory rate of return arithmetic mean outstripping geometric mean Beta (B) values and determining expected excess return fixed, with treasury bills IPO purchases/sales and median vs. average minimizing risk without reducing “single index model” and standard deviation and stocks vs. bonds ratio of the excess return on a portfolio reality, inability to model reforms, accounting practices regression to the mean as contrarian measure Sport Illustrated cover jinx as illustration of widespread examples of Reminiscences of a Stock Operator (Lefevre) resistance levels risks aversion, illustrated by online chatrooms diversification and graphing against expected value (Markowitz optimal portfolios) market-related and stock-related mathematics of minimizing without hurting rate of return options and rate of return and selling short and stocks vs. bonds taking unnecessary Roschach blots Ross, Sheldon roulette rules. see trading strategies rules of thumb, as time saving device rumors conclusions based on not being able to ignore when considering investments S-shaped curve, P/E ratio S&P 500, buying/selling puts Salomon Smith Barney Samuelson, Paul scaling laws. see power law scams card tricks Ponzi schemes, chain letters, and pyramid schemes sports betting scam stock-newsletter scam scandals. see accounting scandals; fraud Scholes, Myron script, sports scam secrecy complexity resulting from lack of investment strategies and Securities and Exchange Commission (SEC) charging WorldCom of inflated earnings decimalization reforms parable of common knowledge and Security Analysis (Graham and Dodd) self-fulfilling beliefs selling on the margin. see short selling sensitive dependence, nonlinear systems sequences complexity of (mathematics of) random sequences random walk theory and share price, P/E ratio. see also prices, of stocks Sharpe, William Sherra, Jesse Shiller, Robert short selling short-term investors shorting and distorting strategy Shubik, Martin Sidgmore, John Siegel, Jeremy “single index model” (Sharpe) six sigma performance Slovic, Paul Sluggish Market Hypothesis Smith, Adam socially regressive funds Spitzer, Eliot Sport Illustrated spread, making money on St.


pages: 291 words: 81,703

Average Is Over: Powering America Beyond the Age of the Great Stagnation by Tyler Cowen

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Amazon Mechanical Turk, Black Swan, brain emulation, Brownian motion, Cass Sunstein, choice architecture, complexity theory, computer age, computer vision, computerized trading, cosmological constant, crowdsourcing, dark matter, David Brooks, David Ricardo: comparative advantage, deliberate practice, Drosophila, en.wikipedia.org, endowment effect, epigenetics, Erik Brynjolfsson, eurozone crisis, experimental economics, Flynn Effect, Freestyle chess, full employment, future of work, game design, income inequality, industrial robot, informal economy, Isaac Newton, John Markoff, Khan Academy, labor-force participation, Loebner Prize, low skilled workers, manufacturing employment, Mark Zuckerberg, meta analysis, meta-analysis, microcredit, Myron Scholes, Narrative Science, Netflix Prize, Nicholas Carr, pattern recognition, Peter Thiel, randomized controlled trial, Ray Kurzweil, reshoring, Richard Florida, Richard Thaler, Ronald Reagan, Silicon Valley, Skype, statistical model, stem cell, Steve Jobs, Turing test, Tyler Cowen: Great Stagnation, upwardly mobile, Yogi Berra

We see similar dilemmas in the more systematic literature. Remember that old rule of thumb “A bird in the hand is worth two in the bush”? Economists often consider it a “bias” that we value commodities we already own much more than commodities we might acquire (this bias is also known as the “endowment effect”). But for all its apparent irrationality, maybe this is an inescapable part of anyone’s ability to be loyal to friends and family. Maybe part of true loyalty is that we can’t always apply it selectively on a moment’s notice. In that case, these endowment effects may be an essential part of the good life rather than a signal of our irrationality. I’m not saying we know this for sure, only that the models we economists devise don’t really settle it. When economists investigate human rationality, they are often too dependent on arbitrary stipulations about what is rational and what is not, expressed in the form of models.

See healthcare domestic oil production, 177 domestic productivity, 169 Dorn, David, 164 Dreber, Anna, 106 driverless automobiles, 8 drone aircraft, 20–21 Duflo, Esther, 222 Dumaine, Erika, 62 Duncan, Arne, 57 dystopian visions, 135 “Economic Growth Given Machine Intelligence” (Hanson), 135–36 economics behavioral economics, 75–76, 99, 105, 110, 149, 227 and “Big Data,” 221–22 changing emphasis in research, 221–28 computational economics, 222 development economics, 226 economic crises, 50–51, 53, 55, 232 and incentive for innovation, 138 Keynesian, 53–54, 56, 226 macroeconomics, 9, 166, 211–12, 226 microeconomics, 212, 225 and online education, 180 economies of scale, 184 Economou, Rona, 61 education and the changing labor market, 37, 168–69 chess as model for, 185–88, 191–92, 202–3 educational standards, 90 in El Paso, 246 Emporium model, 183–84 and face-to-face instruction, 194–202 and foreign competition, 176 and gaming, 185–88 and geographic trends, 171–72 and income polarization, 4 new higher education models, 188–94 online education, 179–85 and the social contract, 231 and “tutor kings,” 200–201 and wage trends, 40–41 egalitarianism, 189–90 eHarmony, 95 Einstein, Albert, 126, 211, 213, 215 El Paso, Texas, 245–46 elderly population, 51–52, 236–37, 258 elections, 10–11, 234–35 electronic shopping, 27 The Elegant Universe (Greene), 212–13 empiricism, 225–26 employer-provided healthcare, 237–38 Emporium education model, 183–84 endowment effect, 99–100 energy costs, 177 Eng, Richard, 200 engineering, 26 English boarding schools, 199 entertainment industry, 22 epigenetics, 212 Equifax, 125 Euclid, 216–17 Europe, 173–75 evolution of machines, 150–51 exclusivity, 36, 95–96, 192–94 expert testimony, 129 “Face time,” 146 Facebook, 26, 209–10, 221, 257 face-to-face education, 194–202 factor price equalization, 163 factories, 92 Fair Isaac Corporation, 124 Felin, Teppo, 139 Feller, Sébastien, 147 FICO scores, 124 financial crisis, 50–51, 53, 55 financial sector, 25, 41, 128–29, 129–30 fiscal crunch, 231–51 Fischer, Bobby, 101, 108, 188 fixed employment costs, 113 Florida, 8, 237, 241, 251–52 Florida, Richard, 256 “Flynn Effect,” 107–8 Foer, Joshua, 152 food prices, 246, 248 Ford, Martin, 6 foreign competition, 161–63, 163–71, 175–77 Foxconn, 7–8 “fracking,” 177 France, 39 Franchise (Asimov), 10–11 Franklin, Benjamin, 148 free trade, 166, 176 freelancing, 59–63 Freestyle chess compared to traditional chess, 77–83 and computer simulations, 227–28 and decision-making models, 129 described, 77–83 impact on human play, 83–86 masters of, 86–87 origin of, 46–47 and other man-machine collaborations, 86–89, 89–93 and risk-taking behavior, 75–76 and self-education, 202–3 spectator interest in, 156–57 Friendster, 209 Fritz (chess program), 68, 78, 109, 114 futurism, 6, 134 “g factor” (general intelligence), 42–44 game theory, 222 Gates, Bill, 25 Gattaca (1997), 13 Gelfand, Boris, 156 gender issues and changing worker profiles, 30–31 and chess, 106, 108 and labor force trends, 51 and wage trends, 52–53 and wealth inequality, 249 General Electric, 38, 87 general relativity theory, 211 “Generation Limbo,” 62 genetics, 17, 211–12 geographic trends, 171–75 Gerdes, Christer, 106 Germany, 39, 173–74 Global Hawk surveillance drones, 20–21 globalization, 10 Go (game), 135 Gobet, Fernand, 76 Google and availability of knowledge, 7 and “Big Data,” 221 and driverless cars, 8 and the labor market, 26, 27, 34–36 and medical diagnosis, 89 and memory, 151–52, 154 and online marketing, 22 and public trust, 217 and regulatory issues, 17 government budgets and spending, 175, 176, 198, 231–51 GPS technology, 7, 14–15, 113–15, 116–17 “Grand Unified Theories,” 212 Gränsmark, Patrik, 106 Great Recession (2008–2009), 54–59 “great stagnation,” 5 Greek symposia, 197 Greene, Brian, 212–13 Grischuk, Alexander, 109 Hanson, Gordon H., 164 Hanson, Robin, 135–36 Harvard University, 192–94, 201 Hauchard, Arnaud, 147 Hayek, Friedrich, 215 healthcare costs of, 59, 60, 113 employer-provided, 59, 113, 237–38 and the fiscal crunch, 232, 234–39, 242, 249–50 and the labor market, 31, 238 and mandates, 237–38 and physician rating systems, 124–25 and protectionism, 176 and rationing, 249–50 and regulatory issues, 16–17 and wealth inequality, 243–44 hermeticism, 153 Hernandez, Nelson, 78–79, 86, 157, 203 Higgs boson, 212 higher education, 168, 188–94, 194–202 hiring costs, 36, 59, 60 Hirschberg, Julia, 12–13 Hitt, Lorin M., 33 Hlatshwayo, Sandile, 176 Hong Kong, 200–201 Houdini (chess program), 68 household incomes, 38 housing costs, 53, 55, 63, 239–40, 244–45 human judgment and error, 102–3, 104, 131 human-machine interface, 91–92 Hydra (chess program), 69 IBM, 7, 47 imitation, 141, 144.


pages: 250 words: 88,762

The Logic of Life: The Rational Economics of an Irrational World by Tim Harford

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activist fund / activist shareholder / activist investor, affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, colonial rule, Daniel Kahneman / Amos Tversky, double entry bookkeeping, Edward Glaeser, en.wikipedia.org, endowment effect, European colonialism, experimental economics, experimental subject, George Akerlof, income per capita, invention of the telephone, Jane Jacobs, John von Neumann, law of one price, Martin Wolf, mutually assured destruction, New Economic Geography, new economy, Plutocrats, plutocrats, Richard Florida, Richard Thaler, Ronald Reagan, Silicon Valley, spinning jenny, Steve Jobs, The Death and Life of Great American Cities, the market place, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, women in the workforce, zero-sum game

Then he went to the Epcot Center and set up an ordinary-looking stall, just as he had done for years with his sports cards as a graduate student. It was the perfect opportunity to take economic experiments out of the laboratory and into the “field”—somewhere realistic. List was trying to understand this puzzlingly irrational behavior that other economists had shown in the lab: People suddenly value objects more highly simply because they own them. They won’t trade even when logic suggests they should. Economists call this “the endowment effect.” You might recognize this behavior in yourself. Let’s say you have held on to a nice bottle of wine that has been growing in value but that you would never have gone out and bought for the seventy-five dollars it is now worth, even though you could have easily sold it on eBay for that amount. The wine was yours, and even though you would have had no interest in buying it for seventy-five dollars, you were just as unwilling to sell it for that price.

Half the subjects had initially received a Valentine’s Day pin and were offered a Saint Patrick’s Day pin of roughly equivalent value; the other half, who had the Saint Patrick’s Day pin, were offered the Valentine’s Day pin. Because each subject only had a fifty-fifty chance of receiving the pin he or she preferred, each subject would have a 50 percent chance of wanting to trade—if he or she was rational. The endowment effect, though, might have been expected to dampen trades, leaving people clinging to whatever they had originally been given. That irrational clinginess is exactly what John List discovered from the inexperienced collectors. Fewer than one in five of them accepted his offer. But List also discovered that experienced pin collectors were much more likely to trade than inexperienced ones. Each experienced collector (someone who traded more than four times a month) accepted Professor List’s offer about half the time, as a rational person would.

Yet each took a cool, logical view of whether they preferred the Valentine’s Day pin or the Saint Patrick’s Day pin—that is, a view uncolored by which pin happened to be in their hands when the trade was offered. Just to prove the point, John List unloaded his inventory of baseball memorabilia at a sports card convention and found exactly the same mistakes from rookies and exactly the same rationality from experienced collectors. The endowment effect is irrational, and it’s real—but it does not influence experienced people in realistic situations. On another occasion, John List punctured some previously influential laboratory work that seemed to show a different sort of irrationality. Again, his technique was to try to repeat the laboratory experiment in a more natural setting. The original laboratory experiments had divided subjects into “employers” and “workers.”


pages: 254 words: 79,052

Evil by Design: Interaction Design to Lead Us Into Temptation by Chris Nodder

4chan, affirmative action, Amazon Mechanical Turk, cognitive dissonance, crowdsourcing, Daniel Kahneman / Amos Tversky, Donald Trump, en.wikipedia.org, endowment effect, game design, haute couture, jimmy wales, Jony Ive, Kickstarter, late fees, loss aversion, Mark Zuckerberg, meta analysis, meta-analysis, Milgram experiment, Netflix Prize, Nick Leeson, Occupy movement, pets.com, price anchoring, recommendation engine, Rory Sutherland, Silicon Valley, stealth mode startup, Steve Jobs, telemarketer, Tim Cook: Apple, trickle-down economics, upwardly mobile

Although it’s clear that Netflix’ plans failed for several reasons, increasing both the financial and the physical burden on customers, even it admitted that it introduced changes too quickly. People hate change. They love consistency. The posh name for this is status quo bias: the tendency to like things to stay relatively the same, and to perceive any change from the current situation as a loss. Loss aversion leads people to over-estimate the potential losses from a change and under-estimate the potential gains. They also tend to over-value their current situation (the endowment effect). The combinatory outcome of these behaviors is to stick with their current option. People will also stick with their current option if they feel that they have less information about their potential choices. Making people more knowledgeable about or even just giving them increased exposure to their other choices can reduce status quo bias. Netflix’ admission that its plans went too far. An apology without apologizing.

Now, to add an element of excitement, the host gives you the option to switch your choice to the other unopened door. Assuming you’re more interested in winning a car than a goat, what do you do? After the game show host opens the door, most people expect that there’s a 50-50 chance that they have already chosen the correct door. Because they have already made their choice, they are attached to their current door (the endowment effect) and so they stick with it. However, the correct answer is to always switch because there is actually a two-in-three probability that the car is behind the other door. Think of it this way: Before you made a choice, there was an equal one-in-three probability that the car was behind any door. That means there was always a two-in-three probability that the car was behind one of the two doors that you didn’t choose.


pages: 412 words: 115,266

The Moral Landscape: How Science Can Determine Human Values by Sam Harris

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Albert Einstein, banking crisis, Bayesian statistics, cognitive bias, end world poverty, endowment effect, energy security, experimental subject, framing effect, hindsight bias, impulse control, John Nash: game theory, loss aversion, meta analysis, meta-analysis, out of africa, pattern recognition, placebo effect, Ponzi scheme, Richard Feynman, Richard Feynman, risk tolerance, stem cell, Stephen Hawking, Steven Pinker, the scientific method, theory of mind, ultimatum game, World Values Survey

There are other results in psychology and behavioral economics that make it difficult to assess changes in human well-being. For instance, people tend to consider losses to be far more significant than forsaken gains, even when the net result is the same. For instance, when presented with a wager where they stand a 50 percent chance of losing $100, most people will consider anything less than a potential gain of $200 to be unattractive. This bias relates to what has come to be known as “the endowment effect”: people demand more money in exchange for an object that has been given to them than they would spend to acquire the object in the first place. In psychologist Daniel Kahneman’s words, “a good is worth more when it is considered as something that could be lost or given up than when it is evaluated as a potential gain.”33 This aversion to loss causes human beings to generally err on the side of maintaining the status quo.

., 228n61 beehive approach to morality, 89 belief: adoption of, for feeling better, 137–39 bias and, 122–26, 137, 226n36 brain science on, 11, 14, 116–22, 197n22 definitions of, 117 different categories of, 139–40 ethical beliefs, 14 extraneous information and/or context as influence on, 140–42 factual beliefs, 14 freedom of, 136–44 inseparability of reasoning and emotion, 126–31 internet’s influence on, 123 as intrinsically epistemic, 138 knowledge as, 115, 196–97n22 lie detection and, 133–36 meaning of, 115–18, 219–20n15 memory and, 116 mental properties of, 136–40 motivation for, 126 reasoning and, 122, 131–33 religious belief, 137–38, 148–54 science and, 144 wrong beliefs, 21 Benedict, Pope, 200n14 Benedict, Ruth, 20, 60–62 Bentham, Jeremy, 207n12 bias: adaptive fitness versus, 226–27n38 belief and, 122–26, 137, 226n36 decisional conflict, 231n75 definition of, 132 endowment effect and, 75 factors causing, 226n36 internet’s influence on, 123 knowledge and, 123–24 of liberals, 125–26 loss aversion, 75–77, 209n35 medical decisions and, 143, 231n75 of parents, 73 of political conservatives, 124–25 in reasoning, 132, 142–43 of science, 47 sins of commission versus sins of omission, 77 truth bias, 120, 223n26 unconscious and, 122–23 Bible, 3, 34, 38, 150, 166, 236–37n82 Biblical Creationism, 34, 37, 151, 202n19 Bin Laden, Osama, 5 Bingham, Roger, 5–6, 23 BioLogos Foundation, 169 birth control.

See also belief; uncertainty disgust, 153, 181, 212n64, 224–25n34, 233n48 diversity, bewildered by, 85–91 Dobu islanders, 60–62 dogmatism, 22–23, 53, 124–25. See also religion dopamine, 128, 152, 227n51 Douglas, Pamela, 229n62 DSM-IV, 157 Edelman, G. M., 196n16 Edgerton, Robert, 20, 197n25 Einstein, Albert, 179, 202n18, 236n77 Elliot, R., 228n61 embryonic stem-cell research, 5, 23, 171–73 emotions, 89, 126–31, 210n49. See also specific emotions, such as happiness empathy, 99, 177 endowment effect, 75 envy, 222n18 ethics. See morality; values; and headings beginning with moral Europe, 5, 145–46 Evans, Margaret, 151 evil, 27, 64–66, 100–102, 108, 109, 189–90. See also psychopathy evolution, 11, 13–14, 36, 48–53, 56–57, 147–52, 161, 175, 207–8n19, 216n101, 237–38n99 experiencing self, 184–87 extension neglect, 208n25 facts, 4, 5–6, 10–14, 24–25, 122, 143–44.


pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

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Andrei Shleifer, asset-backed security, Bernie Madoff, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, en.wikipedia.org, endowment effect, equity premium, financial intermediation, financial thriller, fixed income, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, Menlo Park, mental accounting, Milgram experiment, money market fund, moral hazard, new economy, Pareto efficiency, Paul Samuelson, payday loans, Ponzi scheme, profit motive, publication bias, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, the new new thing, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, Vilfredo Pareto, wage slave

“Envy on Facebook: A Hidden Threat to Users’ Life Satisfaction?” 192 Akerlof.indb 192 BIB LIOGR APHY 6/19/15 10:24 AM Wirtschaftsinformatik Proceedings 2013. Paper 92. http://aisel.aisnet.org/ wi2013/92. Krugman, Paul. “What’s in the Ryan Plan?” New York Times, August 16, 2012. Krugman, Paul, and Robin Wells. Microeconomics. 2nd ed. New York: Worth Publishers, 2009. Lakshminarayanan, Venkat, M. Keith Chen, and Laurie R. Santos. “Endowment Effect in Capuchin Monkeys.” Philosophical Transactions of the Royal Society B: Biological Sciences 363, no. 1511 (December 2008): 3837–44. Lattman, Peter. “To Perelman’s Failed Revlon Deal, Add Rebuke from S.E.C.” New York Times Dealbook, June 13, 2013. Accessed December 1, 2014. http://dealbook.nytimes.com/2013/06/13/s-e-c-charges-and-fines -revlon-for-misleading-shareholders/?_php=true&_type=blogs&_r=0.

The title of DellaVigna and Malmendier’s article in the American Eco­ nomic Review. 13. M. Keith Chen, Venkat Lakshminarayanan, and Laurie R. Santos, “How Basic Are Behavioral Biases? Evidence from Capuchin Monkey Trading Behavior,” Journal of Political Economy 114, no. 3 (June 2006): 517–37. 14. Stephen J. Dubner and Steven D. Levitt, “Keith Chen’s Monkey Research,” New York Times, June 5, 2005. 15. Venkat Lakshminarayanan, M. Keith Chen, and Laurie R. Santos, “Endowment Effect in Capuchin Monkeys,” Philosophical Transactions of the Royal Society B: Biological Sciences 363, no. 1511 (December 2008): 3837–44. 16. Adam Smith, The Wealth of Nations (New York: P. F. Collier, 1909; originally published 1776), p. 19. Emphasis added. 17. For a version of Pareto’s original writings, see Vilfredo Pareto, Man­ ual of Political Economy: A Critical and Variorum Edition, ed. Aldo Montesano et al.

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

Gilbert (Oxford University Press, Oxford, 1993). 264 4099.indd 264 29/03/13 2:23 PM Notes to pp. 38–59   3. The Economics of Climate Change: The Stern Review (Cambridge University Press, Cambridge, 2006).   4. A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book 1, ch. 8: ‘Of the Wages of Labour’.   5. D. Kahneman, J. L. Knetsch and R. H. Thaler, ‘Experimental Tests of the Endowment Effect and the Coase Theorem’, Journal of Political Economy, 98.6 (1990).   6. Source: Maddison; all data can be found at the historical statistics section at http://www.ggdc.net/maddison/oriindex.htm.   7. O. Wright and K. Rawlinson, ‘Jobseekers “Slept Rough” Then Staffed Royal Pageant for Free’, Independent, 6 June 2012, at http://www.independent.co.uk/news/uk/home-­ news/jobseekers-­s lept-­rough-­t hen-­s taffed-­royal-­p ageant-­f or-­f ree-­7 818043.html (accessed Jan. 2013).   8.

The International Monetary Fund 1945–1965: Twenty Years of International Monetary Cooperation, vol. 3: Documents, International Monetary Fund, Washington, DC, 1969 Johnson, S. and Mitton, T. ‘Cronyism and Capital Controls: Evidence from Malaysia’, NBER Working Paper No. 8521, Oct. 2001 Jones, J. ‘Americans Say Federal Government Wastes Over Half of Every Dollar’, Gallup, 19 Sept. 2011 Kahneman, D. Thinking Fast and Slow, Allen Lane, London, 2011 Kahneman, D., Knetsch, J. L. and Thaler, R. H. ‘Experimental Tests of the Endowment Effect and the Coase Theorem’, Journal of Political Economy, 98.6 (1990) Kalecki, M. ‘Professor Pigou on “The Classical Stationary State”: A Comment’, Economic Journal (Royal Economic Society), 54 (1944) Kaplan, E. and Rodrik, D. ‘Did the Malaysian Capital Controls Work?’, John F. Kennedy School of Government, Harvard University, Cambridge, MA, Feb. 2001 Keynes, J. M. ‘The Economic Consequences of Mr Churchill’, in Essays in Persuasion, Norton, New York, 1963 275 4099.indd 275 29/03/13 2:23 PM When the Money Runs Out Keynes, J.


pages: 111 words: 1

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb

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Antoine Gombaud: Chevalier de Méré, availability heuristic, backtesting, Benoit Mandelbrot, Black Swan, commoditize, complexity theory, corporate governance, corporate raider, currency peg, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, endowment effect, equity premium, fixed income, global village, hindsight bias, Kenneth Arrow, Long Term Capital Management, loss aversion, mandelbrot fractal, mental accounting, meta analysis, meta-analysis, Myron Scholes, Paul Samuelson, quantitative trading / quantitative finance, QWERTY keyboard, random walk, Richard Feynman, Richard Feynman, road to serfdom, Robert Shiller, Robert Shiller, selection bias, shareholder value, Sharpe ratio, Steven Pinker, stochastic process, survivorship bias, too big to fail, Turing test, Yogi Berra

He then completely pulled the money, offering no explanation. What characterizes real speculators like Soros from the rest is that their activities are devoid of path dependence. They are totally free from their past actions. Every day is a clean slate. Path Dependence of Beliefs There is a simple test to define path dependence of beliefs (economists have a manifestation of it called the endowment effect). Say you own a painting you bought for $20,000, and owing to rosy conditions in the art market, it is now worth $40,000. If you owned no painting, would you still acquire it at the current price? If you would not, then you are said to be married to your position. There is no rational reason to keep a painting you would not buy at its current market rate—only an emotional investment. Many people get married to their ideas all the way to the grave.

., 1999, Well-being: The Foundations of Hedonic Psychology. New York: Russell Sage Foundation. ———, and S. Frederick, 2002, “Representativeness Revisited: Attribute Substitution in Intuitive Judgment.” In Gilovich, Griffin, and Kahneman. ———, J. L. Knetsch, and R. H. Thaler, 1986, “Rational Choice and the Framing of Decisions.” Journal of Business, Vol. 59 (4), 251–278. ———, J. L. Knetsch, and R. H. Thaler, 1991, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias.” In Kahneman and Tversky (2000). ———, and D. Lovallo, 1993, “Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk-taking. Management Science, 39, 17–31. ———, P. Slovic, and A. Tversky, eds., 1982, Judgment Under Uncertainty: Heuristics and Biases. Cambridge, Eng.: Cambridge University Press. ———, and A. Tversky, 1972, “Subjective Probability: A Judgment of Representativeness.”


pages: 598 words: 140,612

Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier by Edward L. Glaeser

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affirmative action, Andrei Shleifer, Berlin Wall, British Empire, Broken windows theory, carbon footprint, Celebration, Florida, clean water, congestion charging, declining real wages, desegregation, diversified portfolio, Edward Glaeser, endowment effect, European colonialism, financial innovation, Frank Gehry, global village, Guggenheim Bilbao, haute cuisine, Home mortgage interest deduction, James Watt: steam engine, Jane Jacobs, job-hopping, John Snow's cholera map, Mahatma Gandhi, McMansion, megacity, mortgage debt, mortgage tax deduction, New Urbanism, place-making, Ponzi scheme, Potemkin village, Ralph Waldo Emerson, rent control, RFID, Richard Florida, Rosa Parks, school vouchers, Seaside, Florida, Silicon Valley, Skype, smart cities, Steven Pinker, strikebreaker, the built environment, The Death and Life of Great American Cities, the new new thing, The Wealth of Nations by Adam Smith, trade route, transatlantic slave trade, upwardly mobile, urban planning, urban renewal, urban sprawl, William Shockley: the traitorous eight, Works Progress Administration, young professional

Census Bureau, American Community Survey, 2006 Data Profile for the City of New Orleans and the New Orleans MSA, generated using American FactFinder. 257 putting infrastructure in a place that lost its economic rationale: A recent article estimates $142 billion in federal funds have been spent. Sasser, “Katrina Anniversary.” 261 status quo bias: Kahneman et al., “Experimental tests of the endowment effect and the Coase theorem,” 1325-48. 262 impact bias: Gilbert, Stumbling on Happiness. 263 circuitous route keeps speeds down: Dennis, “Gas Prices, Global Warming.” 264 more than 60 percent of Americans are home owners: U.S. Census Bureau, Current Population Survey, Housing Vacancies and Homeownership Annual Statistics: 2009, table 1A, “Rental Vacancy Rates, Homeowner Vacancy Rates, Gross Vacancy Rates, and Homeownership Rates for Old and New Construction,” www.census.gov/hhes/www/housing/hvs/annual09/ann09ind.html. 264 The average deduction . . . between $40,000 and $70,000: Poterba and Sinai, “Tax Expenditures for Owner-Occupied Housing.” 265 and 85 percent of such dwellings are renter-occupied: U.S.

Palo Alto, CA: Stanford University Press, 1982. Johnson, Steven. The Ghost Map: The Story of London’s Most Terrifying Epidemic—and How It Changed Science, Cities, and the Modern World. New York: Riverhead Books, 2006. Jordan, David P. Transforming Paris: The Life and Labors of Baron Haussmann. New York: Free Press, 1995. Kahneman, D., J. L. Knetsch, and R. H. Thaler. “Experimental Tests of the Endowment Effect and the Coase Theorem.” Journal of Political Economy 98 no. 6 (1990): 1325-48. http://www.journals.uchicago.edu/doi/abs/10.1086/261737. Kain, John F., and Joseph J. Persky. “Alternatives to the Gilded Ghetto.” Public Interest 14 (Winter 1969): 74-83. Kain, John F., and John M. Quigley. “Housing Market Discrimination, Home-Ownership, and Savings Behavior.” American Economic Review 62, no. 3 (June 1972): 263-77.


pages: 387 words: 120,155

Inside the Nudge Unit: How Small Changes Can Make a Big Difference by David Halpern

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Affordable Care Act / Obamacare, availability heuristic, carbon footprint, Cass Sunstein, centre right, choice architecture, cognitive dissonance, collaborative consumption, correlation does not imply causation, Daniel Kahneman / Amos Tversky, endowment effect, happiness index / gross national happiness, hindsight bias, illegal immigration, job satisfaction, Kickstarter, libertarian paternalism, light touch regulation, market design, meta analysis, meta-analysis, Milgram experiment, nudge unit, peer-to-peer lending, pension reform, presumed consent, QR code, quantitative easing, randomized controlled trial, Richard Feynman, Richard Thaler, Right to Buy, Ronald Reagan, Rory Sutherland, Simon Kuznets, skunkworks, the built environment, theory of mind, traffic fines, World Values Survey

Viewed from Monday, three or four days away is pretty close, but viewed from a Friday, three or four days away is another world away – it’s next week.11 The inconsistency in our preferences also applies to the past. When people are asked how much they would pay for an object, such as a souvenir mug or pen, they give a much lower figure than the one they come up with after they have been given the item. Known as the ‘endowment effect’, this doesn’t seem just to be a negotiating strategy. Rather, it seems to be that once we’ve mentally labelled something as ours, we value it much more highly than we did before. That’s one of the reasons so many of us find our homes full of bits and pieces that we really should have thrown out long ago, and if we saw the same type of thing in other people’s homes we’d surely think they should throw them out.

(page numbers in italics refer to illustrations) advertising: and alcohol 100–1 and humour 100 and shock 98–100, 100 and smoking 99, 100 airport expansion 98 alcohol 100–1, 127 and calories 100 and pregnancy 126–7 Alexander, Danny 281 anaesthetics 17 ‘animal spirits’ 207, 210, 211 Aos, Steve 282 Ariely, Dan 96–7, 134, 325 Aristotle 221, 240 Armstrong, Hilary 34 Asch, Solomon 26 ASH (Action on Smoking and Health) 189 Ashford, Maren 57, 83 attentional spotlight 83–4 Ayres, Ian 142 Bazerman, Max 134, 325 Beales, Greg 36 Behavioural Insights Team (BIT) (see also nudging): arguments lost by 212–14 becomes social-purpose company 350 beginnings of x–xi, 50–8, 56, 58, 341 current numbers employed by xiii, 341 current trials by 341 expansion of xiii governments follow 11 initial appointments to 56–7, 56 initial scepticism towards 9 most frequent early criticisms of 333 naming of x–xi, 52–3 objectives of 54–5 and transparency, efficacy and accountability, see under nudging and webpage design 275–9, 276 World Bank’s request to 125 year of scepticism experienced by 274 behavioural predators 312–13 Benartzi, Shlomo 64 benefits, see welfare benefits Bentham, Jeremy 221–2 BIG lottery 283 ‘Big Society’ 43, 50, 142, 250 BIT, see Behavioural Insights Team Blair, Tony 151, 225 and behavioural approaches in government 302 Brown takes over from 36, 260–1 review into tenure of 34 Strategy Unit of 31 Tories’ admiration of 50 Bogotá 135, 146 Bohnet, Iris 123 Britton, John 188 Brown, Gordon 34 becomes PM 36, 260–1 Byrne, Liam 47 Cameron, David 151 BIT set up by 8 and Coalition Agreement 38 and data transparency 159 Hilton appointed by 43 and randomised controlled trials 274 and response to notes 186 and smoking 194 and well-being 225–8, 227, 250 car tax 3, 91, 92, 275–8 carrier bags 23 Centre for Ageing Better 282 Centre for Local Economic Growth (LEG) 282, 288 Chand, Raj 146 charities 116–20, 142–4, 144 and reciprocity 116 Chetty, Raj 64 childbirth, see pregnancy and childbirth Cialdini, Robert 34–6, 47, 107–8, 109, 113, 121–2, 308, 312 Clegg, Nick, and Coalition Agreement 38 Cochrane, Dr Archie 269–71, 295, 297 Cochrane Collaboration 271 cocktail-party effect 86 cognitive dissonance 21 cognitive psychology 27–9, 28 Colbourne, Tim 215 College of Policing 282, 289 Collins, Kevan 283, 285 Community First 254–5 commuting 219–20, 263–4 conflict and war 20–1, 27, 87, 344–5 consumer feedback 161–9, 167 improvements driven by 168–9 in public sector 163–9, 167 cooling-off periods 77 Council Tax 95 crime prevention (see also theft): ‘scared straight’ approach to 266–8, 267 and ‘What Works’ institutes 289 Darley, J. 27, 110 data transparency 153–84 and better nudges 179–80 and consumer feedback 161–9, 167 improvements driven by 168–9 in public sector 163–9, 167 and food labelling 172, 178 and machine-readable code 154, 157, 159 and RACAP 157 in restaurants 178 and understandable information 176–9 on cancer 178–9 on car safety 177–8 on financial products 177 and utility suppliers 154–60, 155 Davey, Ed 157 Deaton, Angus 243 decision fatigue 141 Deep Blue 7 Diener, Ed 231 disability-adjusted life years (DALYs) 272 discontinuity design 161–2 doctors’ handwriting 72, 72 Dolan, Paul 47–8, 220 Down, Nick 113 drivers’ behaviour 18, 18 Duckworth, Angela 247 Dunn, Elizabeth 220, 237, 250, 256 Durand, Martine 243 Dweck, Carol 343 e-cigarettes 188–97, 193, 215 estimated years of life saved by 195, 216 and non-smokers 193–4 and quit rates 192–3, 193 by socio-economic grouping 195 Early Intervention Foundation (EIF) 282 EAST (Easy, Attractive, Social, Timely) framework 10, 60, 149, 349 Attractive 80–105, 81, 85, 94 Easy 62–79, 68, 72, 73 and jobcentres 200 Social 106–25, 115, 118, 120, 122 (see also social influence) Timely 126–49, 129 Easterlin, Richard 238 eating habits 139, 171, 307 (see also obesity/weight issues) and choice 306–7 and food pyramid/plate illustrations 41, 41 and food tax 301–2 and healthy/unhealthy food 41, 82, 101–2, 216, 302 ‘mindless’ 171 Economic and Social Research Council 283 economy, UK 205–12 econs 6–7, 178, 223 education 137, 282 financial 64 further 146–7 and timely intervention 146–7 and ‘What Works’ institutes 283–7, 284, 286 Educational Endowment Foundation (EEF) 282, 283–7, 284, 286 Effectiveness and Efficiency (Cochrane) 295 endowment effect 140 Energy Performance Certificate 179 energy ratings 135 energy and utility suppliers, see utility suppliers Enterprise Bill 159 Epley, Nick 260–1 established behaviour, see habits ethnicity, and recruitment 137–9, 344 experimental government 266–98, 270, 272, 276 and crime prevention 266–8, 267 ethics of 325–8 (see also nudging: and accountability) and growth vouchers 279–80 and organ donation 275–9, 276 and overseas health-aid programmes 273 and radical incrementalism 291 and ‘What Works’ institutes 281–90, 292–4 Centre for Ageing Better 282 Centre for Crime Reduction 289 Centre for Local Economic Growth (LEG) 282, 288 Early Intervention Foundation (EIF) 282, 288 Educational Endowment Foundation (EEF) 282, 283–7, 284, 286 experimental psychology 24–6 farmers 145 ‘fat tax’ 301–2 (see also eating habits) fertiliser 145 Feynman, Richard 296, 297 financial crisis 45, 46, 206, 336 (see also UK economy) financial products 177, 206 fines, collecting 3–4, 52, 89, 90–1 Fischhoff, Baruch ix Fisher, Ronald 291 Fiske, Susan 84, 86, 325, 345 food pyramid/plate illustrations 41, 41 forms, prefilling 73–4 fossils 35 Frederick the Great 15, 16 Freud, Lord 279 Gallagher, Rory 55, 88–9, 158, 197–8, 204, 343, 349 gender equality, and company boards 123 Genovese, Kitty 109–10 Gigerenzer, Gerd 178 Gilbert, Danny 139, 220 Gino, Francesca 347 giving 116–20, 142–4, 144, 250 God Complex 269 Gove, Michael 287 Grant, Adam 347 Green Book 46, 228, 258, 259 Grice, Joe 233 Gross Domestic Product (GDP) 222–4, 255 (see also UK economy) Grove, Rohan 211 growth vouchers 279–80 Gyani, Alex 197–8, 203, 204, 343, 349 habits: and early intervention 128–32 key moments to prompt or reshape 132–9 and tax payments 131 Hallsworth, Michael 48, 113 Hancock, Matthew 279 hand washing 99, 140 happy-slave problem 231 Haynes, Laura 56–7 hearing 25 Heider, Fritz 345 Helliwell, John 226–7, 232 Henry VIII 17 herd instinct 161 Heywood, Sir Jeremy 2, 215, 217, 281 The Hidden Wealth of Nations (Halpern) 44 Highway Code 20 Hillman, Nick 165 Hilton, Steve x, 43–4, 51, 53–4, 159, 190, 214, 215, 225–6, 247, 250 and randomised controlled trials 274 hindsight bias ix HMRC 2–3, 8, 87–8, 89, 113, 115, 118, 120, 181–2 (see also tax payments) BIT member’s secondment to 113 non-tax-related business communications sent via 210–11 and online tax forms 74 and randomised controlled trials 274 Homer, Lin 210 honesty 133–4 honours 98 horses’ behaviour 18–19, 19 hospitals: and doctors’ handwriting 72, 72 and patient charts 72–3, 73 Hume, David 221 Hunt, Stefan 209 Hurd, Nick 250 Hutcheson, Francis 221 hyperbolic discounting 139 imprinting 128–9, 129 infant development 128–30 (see also pregnancy and childbirth) and early mother–child ‘meshing’ 129 (see also imprinting) in geese 128–9, 129 and mother’s depression 129 Influence: The Psychology of Persuasion (Cialdini) 34–5, 312 Inglehart, Ronald F. 229 Inland Revenue, see HMRC Institute for Government 40, 46–50 J-PAL 294 jobcentres 120–1, 197–205, 200, 201, 343, 349 (see also unemployment) John, Peter 96 The Joyless Economy (Scitovsky) 223 judges 140 Kahneman, Daniel 27, 29–30, 32, 48, 220, 226, 230 BIT’s work commended by 11 Kasparov, Garry 7 Kennedy, Robert F. 218, 222 Kettle, Stuart 125 Keynes, John Maynard 210, 211–12 King, Dom 48, 72 Kirkman, Elspeth 121, 146 knife crime 122 Kuznets, Simon 222 Laibson, David 64–5, 245, 307 Latene, B. 27, 110 Layard, Richard 225, 242, 248 Lazy Town 82 Legatum Institute 242–3 letters/messages, simplifying 71–3 and handwriting 72 in hospitals 72–3, 73 and prefilled forms 73–5 Letwin, Oliver 213, 217, 281, 295 Life satisfaction (discussion paper) 225 (see also well-being) Linos, Elizabeth 137, 344 List, John 286 litter 23, 35, 94, 107–8, 114 Loewenstein, George 307, 324, 345 loft/wall insulation 3, 75–6 Lorenz, Konrad 128–9, 129 lotteries, as incentive 94–6 Luca, Michael 161–2, 166, 177 Lyard, Richard 238 Lyons, Michael 250 MacFadden, Pat 34 Mackenzie, Polly 51, 215 Major, John 46 Manzi, James 295–6 Marcel, Anthony 136 Martin, Steve 113 Matheson, Jill 227 Mayhew, Pat 66 Mazar, Nina 347 Meacher, Michael 224 mental health 246–9 Merkel, Angela 243 midata, see data transparency Milgram, Stanley 26, 327 Miliband, Ed 34 military recruitment advertising 87 Milkman, Katherine 323 Mill, John Stuart 221 MINDSPACE framework 49–50, 50, 60, 72 motorcycle helmets 66–7 Mulgan, Geoff 225, 301–2 Mullainathan, Sendhil 343 National Citizenship Service (NCS) 251–2, 251 National Institute for Health and Care Excellence (NICE) 195, 271, 281, 290 Nesta 350 Nguyen, Sam 55, 197–8, 343 The Nicomachean Ethics (Aristotle) 240 nicotine-replacement therapy (NRT) 193, 193 (see also smoking) 9/11 28 Norton, Mike 256, 347 Nudge (Thaler, Sunstein) ix–x, 6–7, 39, 157, 234 Nudge Unit, see Behavioural Insights Team nudging (see also Behavioural Insights Team; EAST framework): and accountability 324–5 and experimentation, ethics of 325–8 and the public voice 328–32, 329 defined and discussed 22–4 and efficacy 304, 315–24 and familiarity with approach 319–24 relative 318–19 improving, with better data 179–80 rediscovery of 13 and subconscious priming 136 and transparency 304–15 and behavioural predators 312–13 and choice 306, 314–15 and effective communication vs propaganda 307–11, 311 Nurse Family Partnership 129 Obama, Barack 39–40, 254 acceptance speech of 38 Obama, Michelle 101 obesity/weight issues 101, 170–3, 307 (see also eating habits) in children, levelling of 173 and food labelling 172 and ‘mindless’ eating 171 O’Donnell, Sir Gus (later Lord) 45–6, 47, 57, 225, 227, 227, 242, 258 OECD 293, 340 Office of War Information (US) 21 Olds, David 130 online shopping 109 Ord, Toby 273 organ donation 9, 37, 52, 275–9 Orwell, George 309, 311 Osborne, George 45 and data transparency 159 O’Shaughnessy, James 247 Overman, Henry 288 Paley, William 221 paternalism x, 33, 51, 316 Pelenur, Marcos 135 pensions xii, 9, 62–5, 331 and choice 307 PMSU’s paper on 33 people’s parliaments 332 perception 24–5, 25 Personality responsibility and behaviour change (discussion paper) 301–2 police, ethnic recruits into 137–9, 344 potato consumption 15–16 pregnancy and childbirth 126–7 (see also infant development) Prescott, John 302 Prime Minister’s Strategy Unit (PMSU) 31–3, 47, 53, 225, 337 and Personality responsibility and behaviour change paper 301–2 psychological operations (PsyOps) 30, 308–9, 333 Putnam, Robert 253 radical incrementalism 291 randomised controlled trials (RCTs) 8, 113, 132, 182, 252, 270, 274–5, 283, 297–8, 339 and HMRC 274 Raseman, Sophie 157 RECAP 157 recycling 35 Red Tape Challenge 57 Reeves, Richard 51 Revenue and Customs, see HMRC road fuel 23 road traffic, see vehicles Roberto, Christine 101, 178 Rogers, Todd 146, 321 Rolls-Royce 208 Roosevelt, Franklin D. 21 Ruda, Simon 125, 137, 214, 344 Sainsbury, Lord (David) 46–7 Sanders, Michael 57, 116, 119, 142–3, 146 Scheving, Magnús 81, 82–3 Scitovsky, Tibor 223 Scott, Stephen 247 Seligman, Marty 232, 247 Sen, Amartya 231 Service, Owain 2, 56, 69 Sesame Street 101 Shadbolt, Sir Nigel 158 Shafir, Eldar 343, 345 sight 24–5, 25 Silva, Rohan x–xi, 43–5, 51, 53–4, 159 Singer, Tania 345 small businesses 205–9 passim (see also UK economy) smart disclosure 157 smoke detectors 99 smoking 9, 23, 99, 100, 138 and e-cigarettes 188–97, 193, 215 estimated years of life saved by 195, 216 and non-smokers 193–4 and nicotine-replacement therapy (NRT) 193 and pregnancy 126–7 prevalence of 189 and quit rates 192–3, 193 by socio-economic grouping 195 SNAP framework 48 social influence 26–7, 106–25 and bystander intervention 110 dark side of 109–10 and litter 107–8, 114 norms of: descriptive vs injunctive 108 picking apart 107–11 in policy 111–15 and online shopping 109 and personal touch 119–21 and reciprocity 115–17 social psychology 107 Soman, Dilip 337 Southern Cross station staircase 85 speed bumps 76–7 Sportacus 81–3, 81 Stanford Prison 26–7 Steinberg, Tom 254 stickk.com 142 subconscious priming 136 suicide 67–9, 68, 77 Sunstein, Cass ix–x, 6–7, 22, 39–42, 44, 57, 73, 305, 307, 314 and RACAP 157 supermarkets 80–1, 84, 86, 171–2 and food labelling 173, 178 Sutherland, Rory 187–8 tailored defaults. 307 tax payments 3, 8, 23, 52, 87–8, 88, 89, 112–14, 118, 120, 131, 181–2 in Central America 125 Council Tax 95 and habits 131 and lottery incentive 96–7 and online tax forms 74–5 and randomised controlled trials 274 road duty 3, 91, 92, 275–8 social-norm-based approach to 113, 115 Tetlock, Philip 192 Thaler, Richard 6–7, 22, 39, 44, 50, 51, 53, 57, 305 and BIT’s name 53 and RACAP 157 theft (see also crime prevention): mobile phones 173–6, 174, 175 and target-hardening 78, 214 vehicles: cars 169–70 motorcycles 66–7 time, perception of 128 time-inconsistent preferences 128, 139–45 Times 301–2 tobacco, see smoking Turner Lord (Adair) xii, 33, 331 Tversky, Amos 27, 29, 230 UK economy 205–12, 215, 216 (see also financial crisis; Gross Domestic Product) unemployment 120–1, 122, 197–205, 200, 201, 216, 343, 349 (see also jobcentres) and well-being 255–6 utilitarianism 221–2 utility suppliers: and data transparency 154–60 switching among 153–4, 155–6, 155, 160, 213 vehicles 18–20 safety of 177–8 and speeding 76–7, 92–5, 100 varied penalties for 147 thefts of: cars 169–70 motorcycles 66–7 Victoria, Queen 17 visas 132 Vlaev, Ivo 48 Volpe, Kevin 320 voter registration 95–6 Walsh, Emily 123 Wansink, Brian 171, 306 war 20–1 war and conflict 20–1, 27, 87, 344–5 weight, see obesity/weight issues welfare benefits 8 and conditional cash transfers 135, 145 and timing of payments 135 well-being 218–65 and community 249–55, 251 and commuting 219–20, 263–4 by country 229, 238, 243 drivers of 235–41 material factors 237–9 social factors 239–41 (see also well-being: and community) sunny disposition 235–7 early concepts of 220–2 and GDP 222–4, 255 and governance and service design 258–62 and happy-slave problem 231 and income, work and markets 255–7 and Life satisfaction paper 225 measuring 222–4 big questions concerning 231–3 subjective 228–31 and mental health 246–9 and National Citizenship Service programme 251–2, 251 by occupation 244 and policy 242–3, 258 subjective 224, 228–31 and giving 250 (see also giving) by occupation 244–5 and prostitutes 231–2 UK government’s programme on 226–8, 233–5, 234, 240 unemployment’s effects on 255–6 and utilitarianism 221–2 What Works institutes 281–90, 292–4, 340 Centre for Ageing Better 282 Centre for Crime Reduction 289 Centre for Local Economic Growth (LEG) 282, 288 Early Intervention Foundation (EIF) 282, 288 Educational Endowment Foundation (EEF) 282, 283–7, 284, 286 When Harry Met Sally 160–1 ‘wicked problems’ 170 Willetts, David 165 World Bank 125, 293, 309, 340 World Values Survey (WVS) 229 yelp.com 161–2 Young, Lord 279 ACKNOWLEDGEMENTS THERE ARE MANY people who deserve thanks and credit for the work and results of the Behavioural Insights Team that this book describes, and a rather shorter list for the writing and editing of the book itself.


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The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

In the mid-1990s, Thaler and a former student, Shlomo Benartzi of UCLA, hit upon a way to combat this impulse. They dubbed it SMarT, a not-quite-acronym for “save more tomorrow,” and it involved getting 401(k) participants to agree to an automatic increase in their contribution rate every time they got a pay raise. By taking money that people hadn’t earned yet, the plan bypassed the natural resistance to giving up something one possesses—known as the endowment effect. And by bundling the annual choice of how much to save into a single decision that held for years, SMarT put the long-run-oriented part of the brain in charge. At the company where the plan was first tested in 1998, the 50 percent of employees who chose to sign up for the SMarT plan saw their average savings rate go from 3.5 percent of income to 11.5 percent of income in just over two years.13 That kind of success didn’t go unnoticed, and over the next decade the 401(k) was almost entirely remade along lines suggested by behaviorist research.

See also rational market hypothesis and agency costs, 162 and behavioral finance, 299–300 and the Chicago School, xiii, 101–5 and contrary evidence, 224–25 and corporate finance, 355n. 38 described, 153 and Fama, 97, 206–7 and finance, 202–6 and Friedman, 93 and Graham, 119–20 and information availability, 182 and Jensen, 107 and market anomalies, 304 and market crashes, 228, 232 and Mills, 320 and mutual funds, 125, 130, 131 origin of, 43, 73 and portfolio theory, 54–55, 57 and psychology, 201–2 resistance to, 105–7, 269–70 and risk, 139 and Samuelson, 73 and security analysis, 366n. 29 and Shiller, 196–98 and Shleifer, 247 and stock market bubbles, 315 and takeovers, 166–68 taxonomy of, 101 testing, 190, 194–95 “Efficient Markets: Theory and Evidence” (Fama), 104 Einstein, Albert, 7, 50, 66 Ellis, Charley, 130, 131 Employee Retirement Income Security Act (ERISA), 272, 290 Employee Retirement Security Act, 137–38 endogenous change, 305–6 endowment effect, 294 Engel, Louis, 97–98 Engels, Friedrich, 369n. 1 Engle, Robert, 139 Enron, 267, 283 environmental risk, 185 equilibrium theory and the Arrow-Debreu framework, 77–78 and asset pricing, 87 background of, 9–12 and behavioral finance, 301 and complexity theory, 304–6 and derivatives, 237 and intrinsic values, 193 and Keynesian economics, 35 and mathematics, 49–50 and Pareto’s Law, 349–50n. 2 and Reder, 89–90 and Samuelson, 61 equity risk premium, 141–43, 263–64 Erhard, Werner, 285, 319 Erhard Seminars Training (est), 285 event study method, 102 exchange rates, 92–93, 200, 250 executive compensation, 164–65, 274–79, 279–80, 284–85 expected utility, 51–52, 54, 75, 80, 176–77, 193 experimental economics, 188–90 Fallows, James, 365n. 8 Fama, Eugene, 323 and Alexander, 72 and Asness, 259–60 and behavioral finance, 295–96, 296–97, 298, 299–300 and the Chicago School of Economics, 96 and computing, 99–100 and the efficient market hypothesis, 101, 103–5, 193–94, 204, 206–8 and equity risk premium, 263 and experimental economics, 190 and the Journal of Financial Economics, 201 and Mandelbrot, 70, 134 and market crashes, 232 satirical depiction of, 287–88 and Shleifer, 248, 252 and stock price momentum, 209–10 and value stocks, 225 Fannie Mae, 313 Farmer, J.


pages: 147 words: 45,890

Aftershock: The Next Economy and America's Future by Robert B. Reich

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Berlin Wall, declining real wages, delayed gratification, Doha Development Round, endowment effect, full employment, George Akerlof, Home mortgage interest deduction, Hyman Minsky, illegal immigration, income inequality, invisible hand, job automation, labor-force participation, Long Term Capital Management, loss aversion, mortgage debt, new economy, offshore financial centre, Ralph Nader, Ronald Reagan, school vouchers, sovereign wealth fund, Thorstein Veblen, too big to fail, World Values Survey

Millar Publishing, 1790), pp. 261–63. 9 Almost 10 percent fewer people were killed: See National Highway Traffic Safety Administration Fatality Analysis Reporting System Encyclopedia (http://www-fars.nhtsa.dot.gov/Main/index.aspx). 10 deaths and serious injuries dropped: See U.S. Bureau of Labor Statistics, economic news release: “Workplace Injury and Illness Summary,” October 29, 2009. 4. THE PAIN OF ECONOMIC LOSS 1 Princeton psychologist Daniel Kahneman: See D. Kahneman, J. L. Knetch, and R. H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives, 5, no. 1 (Winter 1991): 193–206. 2 Societies whose living standards drop: Ibid. 3 Behavioral economist Christopher Ruhm: See C. J. Ruhm, Are Recessions Good for Your Health?, National Bureau of Economic Research, March 2006. 4 The stock market crash of 1929: See Leonardo Tondo and Ross J. Baldessarini, Suicides: Causes and Clinical Management, Medscape Medical News (http://cme.medscape.com/viewarticle/413195_2). 5 “the crisis quality of a serious illness”: Robert S.


pages: 168 words: 46,194

Why Nudge?: The Politics of Libertarian Paternalism by Cass R. Sunstein

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Affordable Care Act / Obamacare, Andrei Shleifer, availability heuristic, Cass Sunstein, choice architecture, clean water, Daniel Kahneman / Amos Tversky, Edward Glaeser, endowment effect, energy security, framing effect, invisible hand, late fees, libertarian paternalism, loss aversion, nudge unit, randomized controlled trial, Richard Thaler

WATCH 210, 212 (2013), available at http://econjwatch.org/articles/why-is-there-no-milton-friedman-today-RP. 11. See David Laibson, Golden Eggs and Hyperbolic Discounting, 112 Q.J. ECON. 443, 445 (1997). 12. For a discussion of some of the foundational issues, see Pedro Bordalo, Nicola Gennaioli & Andrei Shleifer, Salience Theory of Choice Under Risk, 127 Q.J. ECON. 1243 (2012); Pedro Bordalo, Nicola Gennaioli & Andrei Shleifer, Salience in Experimental Tests of the Endowment Effect, 102 AM. ECON. REV. 47 (2012). 13. See Ted O’Donoghue & Matthew Rabin, Choice and Procrastination, 116 Q.J. ECON. 121, 121–22 (2001); Richard H. Thaler & Shlomo Benartzi, Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving, 112 J. POL. ECON. S164, S168–69 (2004). 14. See Eric Johnson & Daniel Goldstein, Do Defaults Save Lives?, 302 SCIENCE 1338 (2003), available at http://papers.ssrn.com/sol3/papers.cfm?


pages: 190 words: 53,409

Success and Luck: Good Fortune and the Myth of Meritocracy by Robert H. Frank

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Amazon Mechanical Turk, American Society of Civil Engineers: Report Card, attribution theory, availability heuristic, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, carried interest, Daniel Kahneman / Amos Tversky, David Brooks, deliberate practice, en.wikipedia.org, endowment effect, experimental subject, framing effect, full employment, hindsight bias, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, invisible hand, labor-force participation, labour mobility, lake wobegon effect, loss aversion, minimum wage unemployment, Network effects, Paul Samuelson, Report Card for America’s Infrastructure, Richard Thaler, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Rory Sutherland, selection bias, side project, sovereign wealth fund, Steve Jobs, The Wealth of Nations by Adam Smith, Tim Cook: Apple, ultimatum game, Vincenzo Peruggia: Mona Lisa, winner-take-all economy

Chunliang Feng, Yi Luo, Ruolei Gu, Lucas S Broster, Xueyi Shen, Tengxiang Tian, Yue-Jia Luo, Frank Krueger, “The Flexible Fairness: Equality, Earned Entitlement, and Self-Interest,” PLOS ONE 8.9 (September 2013), http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0073106. 7. Mechanical Turk, https://www.mturk.com/mturk/welcome. 8. John Locke, Second Treatise on Civil Government, 1689, chap. 5, section 27, http://www.constitution.org/jl/2ndtr05.htm. 9. Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5.1 (1991): 193–206. 10. Liam Murphy and Thomas Nagel, The Myth of Ownership, New York: Oxford University Press, 2001. 11. David DeSteno, Monica Y. Bartlett, Jolie Baumann, Lisa A. Williams, and Leah Dickens, “Gratitude as Moral Sentiment: Emotion-Guided Cooperation in Economic Exchange,” Emotion 10.2 (2010): 289–93. 12.


pages: 267 words: 78,857

Discardia: More Life, Less Stuff by Dinah Sanders

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A. Roger Ekirch, Atul Gawande, big-box store, carbon footprint, clean water, clockwatching, cognitive bias, collaborative consumption, credit crunch, endowment effect, Firefox, game design, Inbox Zero, income per capita, index card, indoor plumbing, Internet Archive, Kevin Kelly, late fees, Marshall McLuhan, McMansion, Merlin Mann, side project, Silicon Valley, Stewart Brand

Instead of sliding our fresh selves into the world and leaving our old snakeskins behind, we retain every one, acting as both collector and specimen. We run our own fan clubs. The San Francisco haulage program RecycleMyJunk.com tweaked this sentiment delightfully with signs on their trucks reading, “The Smithsonian already has one.” Our attachment to physical objects is tightly related to what behavioral scientists call the “endowment effect”; in other words, just owning something makes us less inclined to consider getting rid of it. However, recent studies by Stanford University and University of Pennsylvania psychologists, as cited by Katharine Sanderson in Nature News, have shown that the pain of parting does not derive from overvaluing the item but is pure aversion to losing something regardless of its current utility to us.


pages: 270 words: 64,235

Effective Programming: More Than Writing Code by Jeff Atwood

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AltaVista, Amazon Web Services, barriers to entry, cloud computing, endowment effect, Firefox, future of work, game design, Google Chrome, gravity well, job satisfaction, Khan Academy, Kickstarter, loss aversion, Marc Andreessen, Mark Zuckerberg, Merlin Mann, Minecraft, Paul Buchheit, Paul Graham, price anchoring, race to the bottom, recommendation engine, science of happiness, Skype, social software, Steve Jobs, web application, Y Combinator, zero-sum game

Students who spaced out their commitments did well; students who did the logical thing and gave no commitments did badly. Steer clear of offers of low-rate trial periods which auto-convert into automatic recurring monthly billing. They know that most people will procrastinate and forget to cancel before the recurring billing kicks in. Either favor fixed-rate, fixed-term plans — or become meticulous about cancelling recurring services when you’re not using them. 6. Utilize the Endowment Effect Ariely and Carmon conducted an experiment on Duke students, who sleep out for weeks to get basketball tickets; even those who sleep out are still subjected to a lottery at the end. Some students get tickets, some don’t. The students who didn’t get tickets told Ariely that they’d be willing to pay up to $170 for tickets. The students who did get the tickets told Ariely that they wouldn’t accept less than $2,400 for their tickets.


pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

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Andrei Shleifer, availability heuristic, bank run, Black Swan, Cass Sunstein, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, iterative process, Kenneth Arrow, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, money market fund, moral hazard, mortgage debt, Pareto efficiency, Paul Samuelson, placebo effect, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, source of truth, statistical model, stochastic process, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning, Vilfredo Pareto

After Hurricane Katrina in August 2005, the government initially fell short in its response but subsequently has spent billions to compensate the victims and increase the protections against future flood risks. Many economists debated the wisdom of rebuilding New Orleans and strengthening the protections against future flooding given the inherent riskiness of the Gulf Coast region. Such musings may have academic interest but are of little practical consequence: The city is being rebuilt. A well-established finding in behavioral economics is the “endowment effect,” whereby people place an inordinately large value on assets in their possession. New Orleans itself might be viewed as one such asset that we collectively possess, as it ranks among the most important cities in the United States in terms of historical and architectural interest. Individual property values there certainly understate the worth of New Orleans to the country. So, politically, any plan of action that does not ensure the survival of New Orleans is simply a nonstarter.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

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Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, break the buck, Bretton Woods, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, London Whale, Long Term Capital Management, market bubble, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, savings glut, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

The economist Richard Thaler ran a series of experiments like the following. Coffee mugs were randomly distributed to half the students in a class, then all students were invited to trade so that those who value the mugs the most could buy them from those who valued them the least. On average, students demanded twice as much to sell what they already had as they would pay for something they did not yet have. Thaler dubbed this “the endowment effect”: people put greater value on something when they own it than when they don’t. They also feel worse about losing something they already own than failing to get it in the first place. The reasons why vary: you may have mental associations with something that you don’t want to give up; you may worry about regret, or retribution, for giving up something you once had. Uncertainty—not knowing whether you will have more money, or less—taxes the psyche.


pages: 302 words: 83,116

SuperFreakonomics by Steven D. Levitt, Stephen J. Dubner

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agricultural Revolution, airport security, Andrei Shleifer, Atul Gawande, barriers to entry, Bernie Madoff, call centre, clean water, cognitive bias, collateralized debt obligation, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, deliberate practice, Did the Death of Australian Inheritance Taxes Affect Deaths, disintermediation, endowment effect, experimental economics, food miles, indoor plumbing, Intergovernmental Panel on Climate Change (IPCC), John Nash: game theory, Joseph Schumpeter, Joshua Gans and Andrew Leigh, loss aversion, Louis Pasteur, market design, microcredit, Milgram experiment, oil shale / tar sands, patent troll, presumed consent, price discrimination, principal–agent problem, profit motive, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, selection bias, South China Sea, Stephen Hawking, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, ultimatum game, urban planning, William Langewiesche, women in the workforce, young professional

Katz and Alexi A. Wright, “Circumcision—A Surgical Strategy for HIV Prevention in Africa,” New England Journal of Medicine 359, no. 23 (December 4, 2008); also drawn from author interview with Katz. EPILOGUE: MONKEYS ARE PEOPLE TOO See Stephen J. Dubner and Steven D. Levitt, “Monkey Business,” The New York Times Magazine, June 5, 2005; Venkat Lakshminarayanan, M. Keith Chen, and Laurie R. Santos, “Endowment Effect in Capuchin Monkeys,” Philosophical Transactions of the Royal Society 363 (October 2008); and M. Keith Chen and Laurie Santos, “The Evolution of Rational and Irrational Economic Behavior: Evidence and Insight from a Non-Human Primate Species,” chapter from Neuroeconomics: Decision Making and the Brain, ed. Paul Glimcher, Colin Camerer, Ernst Fehr, and Russell Poldrack (Academic Press, Elsevier, 2009). / 212 “Nobody ever saw a dog”: see Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, ed.


pages: 369 words: 128,349

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

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3Com Palm IPO, Andrei Shleifer, asset allocation, capital asset pricing model, correlation coefficient, cross-subsidies, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, survivorship bias, transaction costs, Vanguard fund

Stein. 1999. A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets. Journal of Finance 54(6), 2143–84. Kadlec, Gregory B., and John J. McConnell. 1994. The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings. Journal of Finance 49(2), 611–36. Kahneman, Daniel, Jack L. Knetsch, and Richard H. Thaler. 1991. Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias. Journal of Economic Perspectives 5(1), 193–206. Kahneman, Daniel, and Amos Tversky. 1979. Prospect Theory: An Analysis of Decision Under Risk. Econometrica 47(2), 263–92. Mackenzie, Craig. 1997. Where Are the Motives? A Problem with Evidence in the Work of Richard Thaler. Journal of Economic Psychology 18(1), 123–35. Merton, Robert C. 1987. Presidential Address: A Simple Model of Capital Market Equilibrium with Incomplete Information.


pages: 481 words: 125,946

What to Think About Machines That Think: Today's Leading Thinkers on the Age of Machine Intelligence by John Brockman

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3D printing, agricultural Revolution, AI winter, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, algorithmic trading, artificial general intelligence, augmented reality, autonomous vehicles, basic income, bitcoin, blockchain, clean water, cognitive dissonance, Colonization of Mars, complexity theory, computer age, computer vision, constrained optimization, corporate personhood, cosmological principle, cryptocurrency, cuban missile crisis, Danny Hillis, dark matter, discrete time, Douglas Engelbart, Elon Musk, Emanuel Derman, endowment effect, epigenetics, Ernest Rutherford, experimental economics, Flash crash, friendly AI, functional fixedness, Google Glasses, hive mind, income inequality, information trail, Internet of things, invention of writing, iterative process, Jaron Lanier, job automation, John Markoff, John von Neumann, Kevin Kelly, knowledge worker, loose coupling, microbiome, Moneyball by Michael Lewis explains big data, natural language processing, Network effects, Norbert Wiener, pattern recognition, Peter Singer: altruism, phenotype, planetary scale, Ray Kurzweil, recommendation engine, Republic of Letters, RFID, Richard Thaler, Rory Sutherland, Satyajit Das, Search for Extraterrestrial Intelligence, self-driving car, sharing economy, Silicon Valley, Skype, smart contracts, speech recognition, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, Stewart Brand, strong AI, Stuxnet, superintelligent machines, supervolcano, the scientific method, The Wisdom of Crowds, theory of mind, Thorstein Veblen, too big to fail, Turing machine, Turing test, Von Neumann architecture, Watson beat the top human players on Jeopardy!, Y2K

Rubber was doomed to specialized usage because of its failure to withstand extreme temperatures—until Charles Goodyear slipped up and dropped some rubber on a hot stove. Instead of taking steps to ensure no future mistakes, Goodyear noticed something interesting, and the result was vulcanized, weatherproof rubber. Finally, consider the power of human “bugs”—our biases. For example, optimism makes us believe we can get to the moon, cure all diseases, and start a successful business in a terrifying location whose previous tenant fled. The endowment effect causes us to overvalue what we have, what we ideate, and what we create—even when no one else agrees. But is abandoning all endeavors at the first sign of failure and pursuing one that seems more successful always optimal? The dogged scientists (think of Galileo and Darwin) who persist in the face of generally accepted explanations are being stubborn—being buggy—but the result can be genius.

Crisis and Leviathan: Critical Episodes in the Growth of American Government by Robert Higgs, Arthur A. Ekirch, Jr.

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Alistair Cooke, clean water, collective bargaining, creative destruction, credit crunch, declining real wages, endowment effect, fiat currency, fixed income, full employment, hiring and firing, income per capita, Joseph Schumpeter, laissez-faire capitalism, manufacturing employment, means of production, minimum wage unemployment, Plutocrats, plutocrats, post-industrial society, price discrimination, profit motive, rent control, rent-seeking, Richard Thaler, road to serfdom, Ronald Reagan, Simon Kuznets, strikebreaker, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, transcontinental railway, union organizing, Upton Sinclair, War on Poverty, Works Progress Administration

Fialka, "Oregon Congressman Outflanks the Pentagon In Single-Minded, Single-Handed Weapon War," Wall Street Journal (Sept. 13, 1985): 54. 29. Victor R. Fuchs, "The Economics of Health in a Post-Industrial Society," Public Interest (Summer 1979): 16; Shultz and Dam, Economic Policy Beyond the Headlines, pp. 51-52; John Mark Hansen, "The Political Economy of Group Membership," American Political Science Review 79 (March 1985): 81. 30. See the related discussions of the "endowment effect" by Richard H. Thaler, "Illusions and Mirages in Public Policy," Public Interest (Fall 1983): 64-65; of "hysteresis" by Hardin, Collective Action, pp. 82-83; of "universalism and reciprocity" by Alt and Chrystal, Political Economics, pp. 196-197. 31. Nordlinger, Autonomy, p. 38; Dye and Zeigler, The Irony of Democracy, pp. 98-99, 101-102; Dye, Understanding Public Policy, p. 199; Karl, Uneasy State, p. 226; Mancur Olson, The Rise and Decline of Nations: Economic Growth, Stagflation and Social Rigidities (New Haven, Conn.: Yale University Press, 1982), p. 71; Karen A., Rasler and William R.


pages: 464 words: 117,495

The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management by Alexander Elder

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additive manufacturing, Atul Gawande, backtesting, Benoit Mandelbrot, buy low sell high, Checklist Manifesto, computerized trading, deliberate practice, diversification, Elliott wave, endowment effect, loss aversion, mandelbrot fractal, margin call, offshore financial centre, paper trading, Ponzi scheme, price stability, psychological pricing, quantitative easing, random walk, risk tolerance, short selling, South Sea Bubble, systematic trading, The Wisdom of Crowds, transaction costs, transfer pricing, traveling salesman, tulip mania, zero-sum game

Roy Shapiro, a New York psychologist from whose article the title of this subchapter is borrowed, writes: “With great hope, in the private place where we make our trading decisions, our current idea is made ready…. one difficulty in selling is the attachment experienced toward the position. After all, once something is ours, we naturally tend to become attached to it…. This attachment to the things we buy has been called the “endowment effect” by psychologists and economists and we all recognize it in our financial transactions as well as in our inability to part with that old sports jacket hanging in the closet. The speculator is the parent of the idea…. the position takes on meaning as a personal extension of self, almost as one's child might…. Another reason that Johnny does not sell, even when the position may be losing ground, is because he wants to dream….


pages: 1,106 words: 335,322

Titan: The Life of John D. Rockefeller, Sr. by Ron Chernow

California gold rush, collective bargaining, death of newspapers, delayed gratification, double entry bookkeeping, endowment effect, family office, financial independence, Frederick Winslow Taylor, George Santayana, God and Mammon, income inequality, invisible hand, Joseph Schumpeter, Louis Pasteur, Mahatma Gandhi, Menlo Park, New Journalism, oil rush, oil shale / tar sands, passive investing, Plutocrats, plutocrats, price discrimination, profit motive, Ralph Waldo Emerson, refrigerator car, The Chicago School, Thorstein Veblen, transcontinental railway, traveling salesman, union organizing, Upton Sinclair, white picket fence, yellow journalism

He had Junior approach Seth Low, the president of Columbia College, about endowing a professorship in psychology for Charles, who increasingly studied both psychology and philosophy in his work. Junior suggested that it would be more gracious to endow the chair and then let the college voluntarily appoint him, rather than to demean Charles by creating a chair expressly for him. Senior followed this advice and, after making sure that Columbia would give him the chair, gave the school a $100,000 endowment, effectively buying his son-in-law’s job at considerable expense. For a time in the early 1900s, Rockefeller saw a lot of Charles and Bessie, thanks in part to his newfound passion for golf. Desperate for a place where he could extend Pocantico’s limited golf season, he found it in the tony resort of Lakewood, New Jersey, where George Gould and other rich residents played polo, attended tea parties, rode to hounds, and held cotillions.